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The Only Three Questions That Still Count: Investing By Knowing What Others Don't, 2nd Edition by Lara Hoffmans, Jennifer Chou, Kenneth L. Fisher

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It’s Good While It Lasts

The price-to-sales ratio (PSR; sometimes P/S) is a good example of groundbreaking capital markets technology I pioneered that was powerful in its day yet isn’t so much now. I had uncovered a way no one had yet used to tell if a stock might be over- or undervalued—it became the subject of my 1984 book called Super Stocks. While Ben Graham made passing mention of the relationship between price and sales being potentially interesting, the first published work anywhere on the relationship was mine. I’m very proud of that—just like I am of my third-grade school report on Guatemala. But otherwise, neither is noteworthy today. Just memories.

But 30 years ago, if you could simply screen for low-PSR stocks (which wasn’t easy), you could beat the market more often than not. After my book and subsequent exposure, the PSR became widely used and even, off and on, part of the required curriculum for the CFA exam. Most analytical websites include the PSR today. But as capital markets technology and a forecasting tool, the PSR has become largely priced into the market. Even a great discovery becomes obsolete with popularity and time. If it becomes popular, it loses its power. It’s always time to be working on the next discovery.

For the uninitiated (in the event the name didn’t give it away), the PSR tells you a stock’s price relative to its per-share sales. It’s just like a P/E but uses annual revenue or sales where the P/E uses earnings. A stock selling for $25 with ...

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