Unit 3 · Level 2 · The Long Game
Stock value: earnings & P/E
Since a share is a slice of a business, its long-term value tracks the business's PROFITS (earnings). The most famous yardstick is the P/E ratio: price ÷ earnings per share. It answers: 'how many years of current profits am I paying for?'
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What you get asked
A stock trades at $100 with $5 earnings per share. Its P/E is…
100 ÷ 5 = 20. Whether 20 is expensive depends on growth: a fast grower can deserve 40; a shrinking business might be dear at 8.
Why can a high-P/E stock still be a reasonable buy?
Future earnings can shrink today's ratio fast. P/E is a photo; growth is the film. A 40 P/E growing 50%/year gets cheap quickly, IF the growth arrives. That 'if' is the whole game.
Match the metric to its question
Four numbers, one skim of any stock's summary page, instant orientation.
Long-term, stock prices follow ___; short-term, they follow moods.
Ben Graham's classic: short-term a voting machine, long-term a weighing machine. Traders play the votes; investors trust the scale.
Crypto vs stocks, honestly: what does a stockholder have that most token holders don't?
Tokens usually claim only their own scarcity and usefulness. Neither is 'better'; they're different animals. Stocks anchor to earnings; tokens anchor to supply design + adoption. Knowing WHICH anchor you're holding is the sophistication. 🐜
The rest of this unit
DCA, market cap, tokenomics and earnings: telling investments from trades.