# INVESTING Long-term investors tend to favor companies with what Warren Buffett famously called an “economic moat,” a structural advantage that makes it difficult for competitors to erode their market share. Strong brands, proprietary technology, network effects and high customer switching costs point to a company well-positioned to grow and protect its value over decades. Price to Earnings Ratio. A stock’s price alone tells you very little about whether it’s a good long-term investment. Metrics like price-to-earnings ratio, revenue growth, profit margins, and return on equity give you a more complete picture of a company’s financial health and its potential to deliver sustained returns over time. P/E Ratio = Market Price Per Share / Earnings Per Share (EPS) Market Price Per Share: This is the current price at which the stock is trading on the public market. It is constantly changing based on investor demand. Earnings Per Share (EPS): This is the company’s net profit divided by the total number of its outstanding shares. It represents the portion of a company’s profit allocated to each individual share of stock. For example, if a stock trades at $50 per share and the company earned $2.50 per share over the last 12 months, the P/E Ratio is 50 / 2.50 = 20 Historically, the average P/E for the S&P 500 has hovered between 15 and 20. If a stock’s P/E is significantly below this range (e.g., 10), it may be considered “cheap” or undervalued relative to the market. If a stock’s P/E is significantly above this range (e.g., 25 or 30), it may be considered “expensive” or a premium stock that the market expects to deliver rapid, sustained growth. [Buy Costco stock if P/E below 30 (maybe) or below 25 (definitely)](https://www.macrotrends.net/stocks/charts/COST/costco/pe-ratio) Balance Sheet - Strong, low debt, high cash reserves. Competitive Moat - Stable market position, strong brand, or unique product. Investor View- Undervalued, the market is too pessimistic. Time and the power of compound interest The average annual return for the S&P 500 index, which measures the stock performance of the top 500 companies in the United States, is about 10% What is a stock - a share in a publicly traded company What is an index Active investing - constantly buying and selling Passive investing - buy and hold Index vs EFT The main difference between an index fund and an ETF is how they are traded. ETFs can be bought and sold throughout the trading day like stocks, while index funds are only traded once a day after the market closes. ETFs often have lower fees and greater tax efficiency compared to index funds.