Your Investing Mantra

During the bull market of the late 1990s, Wall Street's best-loved stocks became far too expensive, with share prices their earnings couldn't support.

Enron is a textbook example. About the time that everyone was saying "buy it," I (Daria here) looked at Enron as a possible investment for our retirement plans. The price-to-earnings (P/E) ratio was at a lofty 70. That meant I would have to pay $70 to capture $1 of Enron earnings! Way too rich for my blood.

I didn't need to waste time doing any more research. That P/E ratio proved the stock was over hyped and doomed to fail. A healthy respect for P/E ratios can save you a lot of time and losses.

A high P/E ratio is supposed to mean high projected earnings in the future, which is why so many investors were gullible enough to stick with Enron. The average market P/E ratio is 15 to 25, but it can be higher or lower depending on the industry. Large-cap stocks have lower P/Es; aggressive-growth small-caps have higher P/Es.

Dolan Straight Talk Tip: Before you buy a stock, always check how the P/E ratio compares with others in the industry. If the P/E ratio is much higher than the market or industry average, then the company has to either grow like gangbusters over the next few months or years to live up to Wall Street's expectations... or somebody's been messing with the books again. Be suspicious. Be very suspicious!

And when a stock suddenly gets "discovered" by Wall Street, the P/E will rise. Make that your cue to consider selling and locking in the profits!

Many Wall Street pros will cite you chapter and verse on why our theory is too simplistic. We say bravo for the old KISS theory, which should be your investing mantra: Keep It Simple, Stupid. (Actually, it's not stupid at all - it's very smart!)

Now that you have your mantra down, it's time to put it into action! We'll get you started with these articles:

• Getting Started in Stocks
• How to Invest in a Volatile Market
• A Mutual Fund For Every Investor