New investors can easily become overwhelmed by the many investing terms and concepts that they encounter while doing their research. (And if you aren’t doing research, you really should be.) Frankly, it’s a lot to take in, especially if you haven’t had the luxury of spending four years in business school learning about all of the ideas, concepts, terms and so forth on a daily basis.
That being said, what we’re going to do is provide you, our dear readers, with the occasional quick blog about investing terms that you should know, what they mean and how they can help you, starting with today’s blog.
The first investing term were going to look at is the acronym GARP. It stands for Growth At a Reasonable Price and one of the most well-known practitioners of the GARP method is Peter Lynch, the former fund manager for Fidelity. Investors that use GARP combine both a value approach to investing with the growth approach, and throw in a numerical slant by looking for companies with;
- Solid growth prospects
- A current share price that, for whatever reason, doesn’t reflect the intrinsic value of the business behind it
Using GARP an investor gets to not only increase their earnings but also the price-to-earnings (P/E) ratio used to value those earnings.
Investors who use the GARP approach commonly purchase their stocks when the P/E ratio is favorable, meaning that it’s lower than the rate the earnings per share will grow in the future. Using this approach, the P/E of a company will fall if their earnings-per-share grow and their share price remains constant.
High P/Es can normally be sustained by fast-growing companies, allowing the GARP investor to purchase a company that, if the expected growth occurs, will be cheap tomorrow. Their perceived bargain, if growth doesn’t come, can disappear quite quickly however.
It should be noted that the GARP approach to investing is actually a hybrid of another investing tactic, quantitative analysis. The approach allows investors to focus on straightforward numbers rather than other aspects of a business, and has been embraced by many investors including Jim O’Shaughnessy, the author of What Works on Wall Street.
We hope that you found this quick introduction to GARP and binary options interesting and informative. Like we said, we’ll be providing you with short, easy to digest blogs like this one more often in the future, so make sure to bookmark us and check back from time to time if you enjoyed today’s premier edition.