Raging bull or hibernating bear

When a Stock market rises as rapidly as the Sensex , the reporting tends to get polarized. Some business writers become unabashedly bullish - saying India's day in the Sun has finally come; others become unforgivingly bearish predicting that bears will come out of hibernation(mind you most of India, especially Mumbai does not really have a winter).

Consider this article in the Business Week . It's hard to say if the author is in the bullish or bearish camp. So how should you distill out all the information you read about stock markets?

One good rule of thumbs is: The PEG ratio. That is the Price/Earnings ratio looking forward divided by the expected growth rate in earnings(or net income). This ratio should be roughly at 1. If it is MUCH above 1, then one should think twice before investing in a stock. If it is MUCH, below 1, then it might be a diamond in the rough.

Again, this is a simplification of ONE way to value a stock(and an index of stocks). But it is a start. Next time you see an articles that compares 'multiples' to growth rates, you know what they are talking about.

Happy Investing.