 Hey, y'all we're gonna do a video on how to Value stocks Or stonks as the kids say and I'm just gonna wing it and I'm gonna do the whiteboard method Just to make it interesting I'm gonna have some websites as well But I always like to start with how do you value the s&p because If you learn from the s&p It makes it a lot easier so Shiller PE starting with the s&p 500 PE There are times when the s&p is expensive and There are times when the s&p is cheap and the s&p is a basket of stocks It's also representative Representative of the economy so I don't want to go into the history, but if you're old enough you remember recessions like 2008 or the slowdown in 2002 if you're old enough most likely you're not old enough, but Hopefully you're old enough to remember 2008 or maybe 2020 when everything was shut down When there's panic stocks are cheap when everybody's optimistic stocks are more expensive and This is the PE ratio the price Divided by the earnings a high number not so good a Low number better. However When you do see the low number People will be nervous and scared and when you do see the high number people will be feeling very good and talking about growth this Next slide here is the s&p earnings close the ad and it's quite similar to The s&p chart obviously over time the economy gets bigger The main reason is the government prints money and that's why this was a question. I always had as a kid Why do things always go up and part of the reason is they didn't always used to you Historically as innovation Improves You get deflation, but in a system where the banks print money Things always go up at least they try to make it go up all the time 2% They say but usually you get more the s&p on average grows 7 to 10 percent I'm gonna get it. I'm gonna get to how to value stocks, but we got to use this information So earnings go up s&p goes up when the market is going into a tough period and there's panic and there's recessions Companies earn less and that's why for a temporary period Stocks are cheaper These are the best times to buy stocks, but not everybody has money so just keep that in mind That's that's price to earnings. I'm gonna leave that there for now We can cover price to sales a few other formulas, but We're just going to look at PE first okay, so We've got price and you divide that by earnings and you're just trying to find out You know is this a good deal so earnings Is on the bottom price? Let's say the stock is $100 somebody tells you hey, it's 15 You know my math isn't so good. Let me just it should be 15 100 divided by 15 or 8 100 That's actually a pretty good in PE. That's a PE of 6 So this would be a very attractive deal because Historically if we go back to PE Let's see my My head's in the way a little bit, but if you can see 15 PE to 10 PE historically is very good and Anything above that is very less good So in this example, this would be a super cheap stock if on the other hand the price Was a hundred and the earnings was like Let's say four That would not be as good But actually that's a lot of stocks right now are like that. So this would be a PE of 25 Now we are just looking at PE. We are ignoring all the other information, which is quite useful, but I Used to just look at these PE's and I would think that's enough, but that actually isn't enough Because what you'll learn later on is that when the PE is 6 Although it looks cheap It might be cheap for a reason so they could have debt they could have balance sheet issues The business could be not as good Could be international risk I'm not going to go into that Not in this video and then Alternatively a 25 PE may not be bad the other component that's not shown is Growth so if a company is Not growing at all 25 is expensive Or we might be in a low-rate environment If a company is growing at 30% This 25 is actually cheap Because if a company can and that's a hard hard growth rate if a company can grow at 30% Then every year this company will be 30% cheaper. So this 25 PE Won't be 25 next year If it's growing at that speed it would be like what? Two-thirds of that like 15 maybe and a company owned For many years that grows at 30% will become huge and we want those a Company that doesn't grow. Let's say over here. It's it's 0% Can't draw on this Let's say it's 0% then it's gonna it's actually gonna lose you money They might pay a dividend, but they might have issues and may it may just stay flat and you'll lose opportunity So PE alone doesn't tell the whole story Just like PE alone and the S&P doesn't tell the whole story But that's the number one The first thing most investors look at when they're valuing stocks, that's PE. I Think I'll just leave it there and I'll make another video on Price to sales, but that's just PE a quick overview growth is super important and You find out by by reading some analyst reports or getting some some more digging deeper, but PE alone doesn't tell the whole story, but it does tell you a lot Usually it tells you that there's an implied growth or that investors see something and we need to find out more On the next video, I'll cover Price to sales and I'll show how a small company over time becomes a bigger one and how maybe they don't have earnings but They'll have a price to sales ratio and then Some expected growth rate. We'll see you on the next one