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Anything below a 10 P/E is interesting. Below 10 is value investing territory. You might look at shares below 12 if there was a big bull market making everything expensive, but generally you shouldn’t bother. A P/E of 10 is a good ceiling. The lower the better — 7 or 8 P/E tends to be ideal, but in a crash P/Es can get a lot lower, so anything above 1 should get a check. In normal markets anything below a 3 will turn out to be a dead company that has just imploded. However, they are still worth a look over.

Directors buy and of course they sell too. These ‘directors’ buys’ are a very useful tool as the announcement in effect tips the hand of what the directors think about the future prospects of their company. No one knows better what the prospects of a company are than the people running it. They know the good news first and they know the horrible truth about how messy their business really is under the bonnet. They know what’s going on from the crow’s nest to the bilges. They have such a good grasp of the potential of the businesses they run that they are banned from buying or selling for a large part of the year and have to go through a fair amount of paperwork just to do a trade.

That’s common sense. Value investing is all about common sense. Value investing is about having several common sense rules and combining them to focus in on potential winners. A company that is said to be in trouble can be just fine if it has a pile of cash to buffer it from its problems. This is exactly the kind of company we want to look into. While some companies can be strapped for cash, others have more cash in the bank than the company is worth. This might seem ridiculous but it happens time and again.

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A Beginner’s Guide to Value Investing by Clem Chambers


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