How a San Francisco prosecutor became a vice president

Reviewed by Robert C. Kelly

Kamala Harris achieved the historic milestone of becoming the first woman and woman of color to serve as the vice president of the United States. Her career includes roles as an attorney general and U.S. senator.

Key Takeaways

• Kamala Harris served as vice president under President Joe Biden from 2021-2025.
• Kamala Harris made history as the first woman to serve as vice president of the United States.
• She served as both district attorney for San Francisco and as attorney general for the state of California.

Early Life and Education

Kamala Devi Harris was born in Oakland, California on Oct. 20, 1964. Her mother, Shyamala, emigrated from India, became a renowned breast cancer researcher, and received her doctorate the same year Kamala was born. Her father, Donald, came to the U.S. from Jamaica and was an economics professor at Stanford University.

Harris’s parents were active in the civil rights movement. Kamala participated in civil rights marches, even attending as a toddler. Her parents divorced when she was seven. She moved to Montreal at age 12 with her mother and her sister, Maya. Kamala and her sister reportedly organized a successful protest against the owner of their apartment building who wouldn’t let children play on the building’s lawn.

After graduation from Westmount High School in Quebec, Harris returned to the U.S. and entered Howard University in Washington, D.C., where she earned a B.A. in political science and economics. She returned to California and attended the University of California Hastings College of the Law where she earned her J.D. in 1989.

Important

President Joe Biden endorsed Kamala Harris as a candidate for the 2024 Presidential Election after he dropped out of the race.

Notable Accomplishments

Harris began her career as deputy district attorney in Alameda County, California, focusing on sex crimes. She became managing attorney of the Career Criminal Unit in San Francisco, and then chief of the San Francisco Community and Neighborhood Division of the DA’s office in 2000. She established California’s first Bureau of Children’s Justice. As the district attorney of San Francisco in 2004, Kamala Harris presided over the first same-sex wedding following the overturning of Proposition 8.

Harris created an environmental justice unit and launched a program called “Back on Track,” giving educational and employment opportunities to first-time drug offenders. In 2010, Kamala Harris was elected attorney general of California. She secured an $18 billion settlement for homeowners facing foreclosure and a $1.1 billion settlement for students and veterans deceived by a for-profit education company.

In 2021, Kamala Harris became Vice President of the United States as the first woman, woman of color, and South Asian American to assume this role. Harris traveled to more than 19 countries and met with over 150 world leaders to enhance global partnerships and alliances. Harris helped President Biden pass the Inflation Reduction Act in 2022 which cut family expenses, addressed the climate crisis, reduced the budget deficit, and ensured major corporations pay their share of taxes. It also enabled Medicare to negotiate prices for certain high-cost medications.

California Attorney

Harris defeated her former boss, Terence Hallinan, to become San Francisco district attorney in 2003. The conviction rate in San Francisco jumped from 52% to 67% during her first three years. Her “Back on Track” initiative cut recidivism for low-level offenders. During her tenure, Harris was shunned by police unions after she refused to seek the death penalty for a gang member convicted of killing police officer Isaac Espinoza.

In 2021, Harris became the first woman and Black and South Asian American attorney general of California. She is remembered for withdrawing from settlement negotiations with five of the country’s largest financial institutions for improper mortgage practices, eventually settling for five times the proposed amount.

Harris created Open Justice, an online platform that makes criminal justice data available to the public. The database has helped improve police accountability by tabulating the number of deaths and injuries of those in police custody. She also presided over the creation of “Operation Boo,” a mandatory curfew for all homeless sex offenders on Halloween.

U.S. Senator

Harris became the first South Asian American to enter the U.S. Senate in 2016. The left praised her pointed questioning of high-profile witnesses U.S. Attorney General Jeff Sessions and Supreme Court nominee Brett Kavanaugh. Representing California, Harris supported a single-payer healthcare system in the Senate and introduced legislation to provide financial relief to those facing rising housing costs.

Harris joined bipartisan bills less often than all other Senate Democrats, according to GovTrack. Of the 696 bills she co-sponsored, only 14% were introduced by Republicans. On the other hand, she received bicameral (House and Senate) support on more bills than any other member of her Senate class and had the most co-sponsors on her bills of anyone in her class.

Two Presidential Campaigns

Kamala Harris first sought the presidency in 2019. During the campaign, Harris confronted Joe Biden over his opposition to cross-district busing in the 1970s. She delivered a stirring anecdote about the opportunity that busing afforded one child, ending with the dramatic line, “And that little girl was me.” Harris abandoned her campaign in December 2019 and endorsed Joe Biden in March 2020.

Biden chose Harris as his running mate in August 2020, saying, “Back when Kamala was attorney general, she worked closely with (my son) Beau. I watched as they took on the big banks, lifted up working people, and protected women and kids from abuse. I was proud then, and I’m proud now to have her as my partner in this campaign.”Biden served as the 46th President of the U.S. with Harris as his vice president.

When President Biden declined to run for a second term in 2024, Harris said, “I am honored to have the President’s endorsement and my intention is to earn and win this nomination.” However, on Nov. 6, 2024, Donald Trump defeated Kamala Harris.

Philosophies and Publications

Harris published “Smart on Crime: A Career Prosecutor’s Plan to Make Us Safer” in 2009. It explores her philosophy and ideas for criminal justice reform. It portrays Harris as a prosecutor with a tough but empathetic approach.“The Truths We Hold: An American Journey” is Harris’ memoir and “Superheroes Are Everywhere” is a picture book autobiography for children.

Harris is generally considered to be in the moderate wing of the Democratic Party based on her Senate voting. Vice President Harris supported Medicare for All which differed from President Joe Biden. Harris was a co-sponsor of the Green New Deal. As vice president, she favored a path to citizenship for undocumented immigrants living in the U.S. Both favored the protection of Dreamers, including a plan to fix Deferred Action for Childhood Arrivals (DACA).

Did Kamala Harris Help Pass Legislation as a Senator?

Harris introduced a bill that became law in 2019: S. 129 (116th): Saint Francis Dam Disaster National Memorial Act. It provides for the establishment of a national monument to commemorate those killed by the collapse of the Saint Francis Dam on March 12, 1928. Three other bills that she sponsored include S. 3055 (115th): Disaster Victims Passport and ID Relief Act of 2018, S. 3033 (115th): COUNT Victims Act, and S. 729 (115th): John Muir National Historic Site Expansion Act

Who Is Kamala Harris’ Spouse?

Kamala Harris married Douglas Emhoff in 2014. An entertainment and intellectual property lawyer and litigator, he left his law firm after the 2020 presidential campaign to teach at Georgetown University and take up his duties as second gentleman.

Where Was Kamala Harris Born and Raised?

Kamala Harris was born in Oakland, California, and spent her early years in Berkeley, California, and her teenage years in Montreal, Canada, before returning to the U.S. to attend Howard University.

The Bottom Line

Kamala Harris is regarded as the first woman, and the first Black woman, the first South Asian-American elected to hold various government offices and positions, including state attorney general and U.S. senator. Harris served as Vice President of the United States under President Joe Biden.

Fact checked by Vikki Velasquez

The average family of four in the U.S. reportedly spends more than $1,100 a month on groceries, and they’re not being extravagant. Food costs increased about 2.5% in 2024 from the previous year.

A family’s grocery bills often end there, but many states and jurisdictions tack a sales tax on these purchases as well. Their tax rates can fluctuate monthly because legislation to eliminate, reduce, or alter them is frequently proposed.

Key Takeaways

• Most states draw a dividing line between groceries and restaurant meals and don’t tax food purchased for home consumption.
• Numerous states have launched legislation to reduce or eliminate food taxes, but some efforts have failed.
• Several states don’t tax food at the state level but allow their counties and local jurisdictions to do so.
• At least one state taxes retailers instead of consumers.

States That Tax(ed) Food

There are food taxes…and then there are food taxes. Most states that don’t impose them draw a dividing line between food purchased at a grocery store for home preparation and food consumed at a restaurant or from street vendors. The keywords that appear in their legislation are often “unprepared food” or “food intended for home consumption.” These foods dodge the tax.

These states charged a sales tax on grocery store foods at the close of 2024, but legislation is pending in some. They’re listed in order from the cheapest tax to the most expensive.

Kansas

Kansas began phasing out its food tax in 2023, but residents and shoppers still had to pay a 2% tax in 2024, down from 4% in 2023. The state eliminated the tax entirely as of Jan. 1, 2025, making it the most tax-friendly food state on our list heading into 2025 because it’s become one that doesn’t levy a food tax at all.

Arkansas

Arkansas is the second kindest state. The food tax rate in Arkansas is just 0.125% as of 2025. A legislative bid attempted to remove the tax entirely in 2024, but the measure failed. Governor Sarah Huckabee Sanders vowed to try again to eliminate it in her State of the State address in January 2025.

Illinois

The food tax in Illinois has been on-again and off-again in recent years. It was eliminated from July 1, 2022, through June 30, 2023, but was reinstated at 1%. Further legislation is set to eliminate it entirely as of January 2026.

Virginia

Virginia’s food tax is also 1% and it doesn’t apply to all groceries. Most cold-prepared foods and staples are taxed, however.

Missouri

Missouri comes in just behind Illinois and Virginia, with a rate of 1.225%. This is a 3% reduction from 2023, so the state is headed in the right direction for dollar-conscious shoppers.

Utah

Utah’s state tax rate on groceries is 1.75%. A possible elimination of the tax was set to be decided by voters in the November 2024 election, but a rally by lawmakers prevented the issue from appearing on the ballot.

Alabama

Alabama is another state where the food tax has been in flux in recent years. It was cut from 4% to 3% in early 2024 and then was projected to be reduced an additional 1% in September 2024, but was ultimately rejected. According to Alabama’s Department of Revenue, “If there is sufficient growth in the state Education Trust Fund for the next fiscal year, then the state rate will be reduced on September 1, 2025.”

Tennessee

Tennessee imposes a 4% tax rate on food purchases. Legislation was introduced in 2024 to eliminate the tax, but the bill was not passed. Legislators have refined its terms and plan to try again in 2025.

South Dakota

Most groceries in South Dakota are taxed at a rate of 4.2% through at least 2027. Repealing the tax was put to a vote in November 2024, and voters overwhelmingly rejected the option. South Dakota doesn’t have a separate food tax but applies its overall sales tax to food purchases.

Oklahoma

Oklahoma’s grocery tax was up there at 4.5%, but the state eliminated this tax in 2024 for food and ingredients sales. Prepared food is still subject to the tax.

Idaho

This state appears at the top of the most expensive list, with a tax rate of 6%. Idaho does, however, have a grocery tax credit that offsets the sales tax paid on groceries throughout the year. It averages $120 for most residents.

Mississippi

Mississippi charges a sales tax of 7%, which applies to food purchases. This rate makes it the unkindest of all states when it comes to taxing grocery items. In January 2025, the Mississippi House passed a bill to cut the grocery tax over the next decade. As of writing, it’s with the Senate for consideration.

Other Food Taxes

Many of these tax rates come with a big catch: They’re state taxes. Some states don’t prohibit counties and municipalities from piling their own food taxes on top of those charged at the state level, which can greatly increase food costs. They include:

• Alabama: Local jurisdictions
• Arkansas: City and county taxes
• Idaho: Local jurisdictions
• Kansas: Local jurisdictions
• Missouri: Local jurisdictions
• Oklahoma: Municipalities
• Tennessee: Local jurisdictions
• Utah: 1% local and .25% county

Local jurisdictions in Illinois have retained the right to levy the eliminated state tax if they choose to do so.

Important

Hawaii doesn’t charge consumers a food tax, but it did charge retailers at a rate from 4% to 4.5% as of 2024, and they may pass the burden on to their customers with an additional surcharge of up to .5%.

Groceries vs. Restaurant Fare

A distinction must be made between “food” and “groceries.” States that exempt groceries from taxation don’t generally exempt restaurant meals and other let’s-eat-out-tonight food. Tennessee’s rate doesn’t cover restaurant and prepared foods, nor does Oklahoma’s, which excludes dietary supplements.

Utah allows restaurant diners to request a separate receipt for any unprepared food purchases they make at the location so they’re not charged the tax.

States That Offer Help

A few states acknowledge that paying a tax on that loaf of sandwich bread can put a pinch on some household budgets and increase food insecurity. Hawaii offers a grocery tax credit to low-income taxpayers to take some of the bite out of retailers passing on their own tax burdens to consumers.

Low-income earners are eligible for a $120 grocery tax refund in Idaho. Each of a family’s dependents also entitles them to $120. Residents who are age 65 or older get $140.

Tennessee occasionally offers food sales tax “holidays,” abating the tax for short periods.

The Bottom Line

Why tax a need that’s basic to existence? Opponents of food taxes argue strenuously that we must eat to live, and that these taxes hurt low-income families more than others. State governments argue that they need the additional revenue to provide services to their citizens.

Fact checked by Stella Osoba

Passive investing has often been a proven winner in the long term, but investors still need to choose which index to invest in. The S&P 500 and the Nasdaq 100 are two of the most popular options. Both offer a way to buy shares in a portfolio of the largest and most successful U.S. companies.

However, they take different approaches: the Nasdaq 100 concentrates on 100 top tech-heavy growth stocks, while the S&P 500 spreads risk across 500 diverse companies. Your choice ultimately depends on how much risk you wish to take on.

Key Takeaways

• The Nasdaq 100 consists of the 100 largest nonfinancial companies listed on the Nasdaq stock exchange.
• The S&P 500 represents the 500 biggest U.S. stocks by market capitalization.
• Over the long term, the tech-heavy Nasdaq 100 has generated superior returns.
• However, the Nasdaq 100 is also more volatile and suffers bigger losses than the more diversified S&P 500.

Nasdaq 100

The Nasdaq 100 is a collection of the 100 largest nonfinancial companies listed on the Nasdaq stock exchange. Founded in 1985, it is widely considered a proxy for the technology sector and growth stocks and weights stocks based on their market capitalization—meaning the bigger the company’s valuation, the higher the percentage of the index it represents.

As of Jan. 27, 2025, the five biggest holdings were NVIDIA (NVDA), Apple Inc. (AAPL), Microsoft Corporation (MSFT), Amazon.com Inc. (AMZN), and Alphabet Inc. (GOOGL).

S&P 500

The S&P 500 Index represents the 500 biggest U.S. stocks by market capitalization and is regarded as one of the best gauges of U.S. large-cap equities and the overall health of the U.S. stock market.

The S&P 500 index is also capitalization-weighted. However, it is much less concentrated than the Nasdaq 100. The S&P 500, of course, lists 400 more stocks, picks from more than one stock exchange, and offers broader exposure to different sectors. Its biggest holdings, as of Jan. 27, 2025, are NVIDIA, Apple, Microsoft, Amazon (AMZN), and Meta Platforms, Inc. (META)—all tech companies—though about two-thirds of the index consists of other non-tech sectors such as financials, healthcare, and consumer discretionary.

Indexes are benchmarks. You can’t directly buy them. However, there are ways to replicate their performance. Generally, the easiest and cheapest way to do this is through an index exchange-traded fund (ETF).

Nasdaq 100 vs. S&P 500: 20-Year Performance

When deciding which index to invest in, a key consideration is historic performance. In the chart below, we show how much $10,000 invested at the beginning of January 2005 in ETFs tracking the Nasdaq 100 (Invesco QQQ, QQQ) and S&P 500 (iShares Core S&P 500 ETF, IVV) would have been worth in January 2025, both with and without adjusting for inflation.

Which Is the Better Long-Term Investment?

Based on the above, the Nasdaq 100 looks to be the clear winner. However, that doesn’t necessarily mean it is the best option for everyone. Chasing higher returns increases the risk of bigger losses. In addition, if you put your money in or took it out at different points, your returns might look very different.

A key reason for the Nasdaq 100’s outperformance over the past two decades is its heavy concentration in high-growth technology. These growth stocks have been very popular thanks to cheap borrowing costs, landmark changes, and investor enthusiasm for their high earnings potential.

When expectations are high, a minor setback can trigger a sharp sell-off. Tech stocks, particularly in recent times, are often priced to achieve their best-case scenarios. And when the Nasdaq 100 crashes, it crashes hard, as the dotcom bubble proved.

The Bottom Line

The Nasdaq 100 and S&P 500 have both made great investments over the past 20 years. Over the long term, the former has been the best performer. However, because of its heavy concentration and tech focus, the Nasdaq 100 is also more volatile. Ultimately, what’s best for you depends on your risk profile and financial goals.

A Guide to Writing These Derivatives To Earn Income or Hedge Your Portfolio

Reviewed by Samantha Silberstein

Options trading generated a record 48.5 million contracts per day in 2024, yet many investors are uncertain about when to sell them. Selling or writing options can generate steady income for experienced traders, but it requires understanding a key point that many novices get backward: You sell puts when you’re optimistic about a stock’s future and sell calls when you’re pessimistic.

When you sell a put option, you’re promising to buy a stock at a set price if it falls below that level—similar to how an insurance company promises to pay if your car gets damaged. In exchange, you collect a premium upfront. With call options, you’re promising to sell a stock at a certain price, even if it rises much higher.

While selling options can create consistent income, they come with significant risks that demand careful forethought. An uncovered or “naked” call option—where you don’t own the underlying stock—could theoretically lead to unlimited losses if the stock price soars. Understanding when and how to deploy these strategies is crucial for options traders—especially as they differ for calls and puts—and we guide you through what you need to know below.

Key Takeaways

• You sell put options when bullish on a stock’s prospects since you profit if the stock stays above the strike price while keeping the premium you collected.
• You sell call options when bearish on a stock’s outlook.
• “Naked” options selling carries a much higher risk than “covered” positions where you own the underlying stock as protection. That’s because you might be on the hook for buying a stock just as its price is rising more than you anticipated.
• Covered call writing can generate extra income from stocks you already own, making it one of the most popular options strategies.
• Always have an exit strategy or hedge in place before selling options since market moves against your position can lead to substantial losses.

Call vs. Put Options

Options contracts give traders different types of rights. Call options provide the right to buy an asset at a specific price within a set time frame. Put options give the opposite right—to sell an asset at a specific price within a given period.

When investors sell these contracts, they take the other side. Here are the key elements to know about each:

Selling puts: A put seller agrees to buy the asset if the put buyer wants to sell it at the agreed-upon price. This is why traders sell puts when they expect prices to rise (since they’d have to buy at a higher price than the market) and sell calls when they think prices will fall. It’s the opposite view for those buying: Traders buy put options if they anticipate that the asset price will decline.

Selling calls: A call seller commits to sell the asset if the call buyer wants to purchase it at the agreed-upon price. Traders purchase call options if they expect that the underlying asset price will rise; the one selling them expects the price to decline.

Options Terminology: Writing and Naked

In options markets, “writing” means selling an option contract. “Naked” writing means selling options without owning the underlying stock first. If the stock price shifts, you might have to buy it to make up your end of the contract; if you owned it already, this wouldn’t be necessary, nor would you face the potential losses of doing so.

While naked options writing can generate steady income when markets behave as expected, it requires significant expertise and risk management. Professional traders typically only use naked strategies as part of a broader, diversified portfolio with strict position limits and hedging rules.

Important

Many brokers restrict naked options trading to their most experienced clients because of the potential for large losses.

Selling Put Options

Investors sell naked puts when their outlook on the underlying security is that it’s going to rise; the one buying it has a bearish outlook. The purchaser pays a premium to the seller for the right to sell the shares at an agreed-upon price should the price head lower (otherwise they won’t exercise the option).

Since the premium would be kept by the seller if the price closes above the agreed-upon strike price, you can see why an investor would choose to use this type of strategy. 

Example

Suppose you want to write an option on stock ABC. The Oct. 18 95.00 put would receive a $3.00 premium fee from a put buyer. If ABC’s market price is higher than the strike price of $95.00 by Oct. 18, the put buyer won’t exercise the right to sell at $95.00 since it can be sold at a higher price on the market.

Thus, the buyer’s maximum loss is the premium, $3.00. If the market price falls below the strike price, the put seller must buy ABC shares from the put buyer at the higher strike price since the put buyer will exercise their right to sell at $95.00. Below is a chart of the profit and loss at different strike prices.

Selling Call Options

An investor would sell a naked call option if their outlook on a specific asset was that it was going to fall, as opposed to the bullish outlook of a call buyer. The purchaser of a call option pays a premium to the writer for the right to buy the underlying at an agreed-upon price should the price of the asset be above the strike price. In this case, the option seller would get to keep the premium if the price closed below the strike price.

Warning

A naked call position, if not done with enough risk management, can be disastrous since the price of a security can theoretically rise to infinity. The potential profit is limited to the price of the option’s premium while the potential losses aren’t limited at all.

Example

Suppose you wish to sell an option on stock XYZ for $70.00, believing its stock price is heading down. You’ll receive a premium of $6.20 from the call buyer. If the market price of XYZ drops below $70.00, the buyer will not exercise the call option, and your payoff will be $6.20.

If XYZ’s market price rises above $70.00, however, the call seller is obligated to sell XYZ shares to the call buyer at the lower strike price. Should the stock price continue upward, you are on the hook for buying shares of that stock even as its price increases—this is the danger of writing a naked call.

Writing Covered Calls

A covered call refers to selling call options while already owning at least the amount you’ll need to cover if the buyer exercises the contract. To execute this strategy, if you hold a long position in a stock, you would sell call options on the same stock in an attempt to generate income.

Your long position is the “cover” since you can deliver the shares if the buyer of the call option exercises the contract. If you simultaneously buy stock and write call options against that stock position, it is known as a “buy-write” transaction.

Covered call strategies can help generate profits in flat markets, and, in some scenarios, they can provide higher returns with lower risk than their underlying investments.

What Are the Risks of Selling Options?

Selling options can be risky when the market moves adversely. Selling a call option has the risk of the stock rising indefinitely. When selling a put, however, the risk comes with the stock falling, meaning that the put seller receives the premium and is obligated to buy the stock if its price falls below the put’s strike price. Traders selling both puts and calls should have an exit strategy or hedge in place to protect against losses.

When Should You Sell a Call Option?

Investors sell call options when their outlook on a specific asset is bearish, that is, they believe it will fall.

When Should You Sell a Put Option?

Investors sell put options when their outlook on the underlying security is bullish, that is, it will rise.

What Are Other Strategies That Involve Selling Options?

Traders have many different strategies that involve selling options. These include bull put spreads, which involve selling a put option while buying a lower-strike put for protection; bear call spreads, which are similar conceptually but with calls at different strike prices; iron condors, which combine both of these previous spreads to profit from a stock trading within a specific range; and calendar spreads, which involve selling near-term options while buying longer-dated ones with the same strike price, profiting from how the value of options drops in value as it nears expiration.

The Bottom Line

Selling options can generate steady income by collecting premiums, but they require careful consideration of the risks involved and the market outlook. The critical principle is straightforward: Sell puts when bullish and calls when bearish, but always with a clear exit strategy or hedge in place.

While covered call writing offers a more conservative approach by using owned stock as protection, naked options writing demands significant expertise and careful position sizing. Rather than viewing options selling as a stand-alone strategy, successful traders typically incorporate them within a broader set of strategies.

Fact checked by Stella Osoba

In 2007, Warren Buffett made a bold statement about the investment management industry that would lead to one of the most instructive wagers in financial history. His million-dollar bet not only demonstrated the power of simple investment strategies but also exposed fundamental truths about investment costs and market efficiency that remain vital for investors today.

Key Takeaways

• The legendary investor Warren Buffet famously bet $1 million that an S&P 500 index fund would outperform a basket of hedge funds over a 10-year period.
• In 2008, Tom Seides of Protégé Partners accepted the challenge.
• Buffet prevailed, with Seides conceding the bet even before the decade had finished.
• The lesson for the average investor is that low-cost index funds are likely the best long-term option.

The Challenge That Started It All

Buffett’s bet emerged from his long-standing criticism of the high-fee investment management industry. In Berkshire Hathaway’s 2005 annual report, he argued that professional active management would underperform simple, passive investing over time.

To prove his point, he publicly wagered $500,000 (later doubled to $1 million) that no investment professional could select at least five hedge funds that would collectively outperform an S&P 500 index fund over 10 years (after fees). Ted Seides of Protégé Partners accepted the challenge, setting up an almost decade-long contest that would begin on January 1, 2008.

The Performance Gap: Index Fund vs. Hedge Funds

The results were strikingly one-sided, so much so that Buffett basically claimed victory a year early. In the nine years from 2008 through 2016, Buffett’s chosen investment, the Vanguard 500 (a low-cost S&P 500 index fund), delivered an average annual return of around 7.1%. In contrast, the hedge fund portfolio selected by Protégé Partners managed only a 2.2% average annual return.

The difference in dollar terms was, perhaps, even more dramatic: a $100,000 investment in the S&P 500 index fund would have grown to approximately $185,000 in nine years, while the same amount in the hedge funds would have reached only about $121,000.

How Simple Beat Sophisticated

Buffett’s victory wasn’t just about superior returns. It was about the fundamental logic of investing. The hedge funds faced two significant headwinds: high fees and the challenge of consistent outperformance.

While the S&P 500 index fund charged minimal fees (as low as 0.03%), hedge funds typically demand both management fees (around 2% of assets) and performance fees (20% to 50% of any profits). These costs create a substantial hurdle that even skilled managers struggle to overcome.

Moreover, except for 2008, which saw a historic market crash (hedge funds can short the market, while index funds cannot), the S&P 500 outperformed the hedge fund portfolio in every single year of the bet. This is because market efficiency makes it extremely difficult for any active manager to consistently identify and exploit mispriced securities.

Lessons for the Average Investor

The bet’s outcome offers several important lessons for individual investors.

• First, it demonstrates that simplicity often trumps complexity in investing. The straightforward approach of buying and holding a diverse market index consistently outperformed sophisticated trading strategies.
• Second, it highlights the influence of investment costs. Even small differences in fees can compound into significant differences in wealth over time.
• Finally, it suggests that beating the market consistently is extraordinarily difficult, even for highly skilled professionals with vast resources and sophisticated trading strategies.

The Bottom Line

Buffett’s winning bet does more than just prove a point about hedge funds versus index funds. It provides a clear roadmap for individual investors seeking to build wealth over the long term. The victory of the simple index fund strategy suggests that most investors would be better served by focusing on low-cost, broadly diversified investments rather than seeking market-beating returns through expensive, actively managed funds. As Buffett himself concluded, long-term investors will often do best with a low-cost index fund.

Reviewed by Ebony Howard
Fact checked by Vikki Velasquez

Your goal is to make $1 million—or more. While it can seem daunting, hitting the million mark may be more within your reach than you think. Most millionaires in the U.S. are self-made. According to a Ramsay Solutions study of 10,000 millionaires, 79% didn’t receive an inheritance and one-third never earned a six-figure salary in any one year of their career. But they did have discipline over their spending, a savings mindset, and a willingness to sacrifice, which can be a winning combination when it comes to accumulating wealth. And if you start young, time can be an ally.

Key Takeaways

• It’s not necessary to inherit a fortune or pull down a six-figure salary in order to become a millionaire.
• Keeping a tight rein on personal spending is one way to hold onto more of your money—94% of millionaires in one study said they live on less than they make and 93% use coupons all or some of the time when shopping.
• Another way to keep your hard-earned cash: Pay attention to your taxes and claim all the deductions and credits you’re eligible for.
• Spend on real estate that will appreciate rather than high-priced automobiles that will depreciate in value after you’ve owned them for a few years.
• Consider a job change if you’re not being compensated well and you think you’re worth more.

1. Keep a Tight Check on Spending

Many people spend their earnings on goods and services that they don’t need. And even relatively small expenses, such as indulging in a gourmet coffee from a premium coffee shop every morning, can add up and decrease the amount of money you can save. Larger expenses on luxury items also prevent many people from putting money into savings each month. 

It’s usually not just one item or one habit that must be cut out if you want to accumulate sizable wealth. It’s important to adopt a disciplined lifestyle and budget to become wealthy. People who are looking to build their nest eggs must usually make sacrifices. This may mean eating out less frequently, using public transportation to get to work, and/or cutting back on extra, unnecessary expenses.

This doesn’t mean that you should avoid going out and having fun, but you should try to do things in moderation and set a budget if you hope to save money. Saving a sizable nest egg only requires a few minor and relatively painless adjustments to your spending habits, particularly if you start young.

2. Fund Retirement Plans ASAP

Your first responsibility is to pay current expenses such as rent or mortgage, food, and other necessities when you start earning money. The next step after these expenses have been covered should be to fund a retirement plan or some other tax-advantaged savings vehicle.

Retirement planning is unfortunately an afterthought for many young people, and it shouldn’t be. Funding a 401(k), an IRA, or both early in life means you can contribute less money overall and end up with significantly more in the end than someone who put in much more money but started late.

Here’s an example that spells out the difference. If you’re 23 years old and deposit $3,000 per year (that’s only $250 each month) into a Roth IRA earning an 8% average annual return, you’ll have saved $985,749 by the time you’re 65 thanks to the power of compounding. A $1 million goal is well within reach if you make a few extra contributions. Keep in mind that most of your earnings on this type of account are interest. Your $3,000 in contributions alone only add up to $126,000.

But let’s say you wait until you’re 33—an additional 10 years—to start contributing. You have a better job than when you were younger and you earn more, but you know you’ve lost some time. You decide to contribute $5,000 per year.

You get the same 8% return and have the same goal to retire at 65, but your compounded earnings won’t have as much time to grow because you started to save later. When you reach age 65, you’ll have saved $724,753 in this scenario. That’s still a sizable fund, but you had to contribute $160,000 just to get there and it’s over $260,000 less than the $985,749 you could’ve had for paying much less if you started at age 23.

In the Ramsay Solutions study of millionaires, 80% of those surveyed invested in their company’s 401(k) plan and said that one move was the key to their success. In addition, 75% also invested outside of their company plan and reported that regular investing over the long haul also contributed to their wealth.

3. Improve Your Tax Awareness

It’s easy to think that preparing your own tax returns will save you money, and you might be right in some cases. But it may end up costing you money if you fail to take advantage of deductions and credits that are available to you.

Try to become more educated as far as what types of items are deductible. You should also understand when it makes sense to move away from the standard deduction and start itemizing your deductions on your tax return instead. Knowing which tax credits are available to you can also help you save money on your return.

It may pay to hire some help if you’re not willing or able to become educated about filing your income taxes, particularly if you are self-employed, own a business, or have other circumstances that can complicate your tax return.

4. Own Your Home

Many of us rent a home or an apartment because we can’t afford to purchase a home or because we aren’t sure where we want to live for the long term. That’s fine, but renting doesn’t offer the long-term investment that buying a home does since homeownership is a good way to build equity.

It generally makes sense to consider putting a down payment on a home rather than renting because you can build up equity and the foundation for a nest egg over time.

5. Avoid Luxury Wheels

There’s nothing wrong with purchasing a luxury vehicle, but individuals who spend an inordinate amount of their incomes on cars are doing themselves a disservice because this asset depreciates in value so rapidly.

Important

How rapidly a car depreciates depends on the make, model, year, and demand for the vehicle, but the general rule is that a new car loses 20% of its value in the first year, then another 15% per year over the next four years.

Consider buying something practical and dependable that has low monthly payments or that you can pay for in cash. You’ll have more money to put toward your savings in the long run. And your savings are an asset that will appreciate rather than depreciate over time.

6. Don’t Sell Yourself Short

Some individuals are extremely loyal to their employers and they’ll stay with them for years without seeing their incomes take a jump. This can be a mistake because increasing your income is an excellent way to boost your rate of saving.

Always keep your eye out for new opportunities and try not to sell yourself short. Work hard and find an employer who will compensate you for your work ethic, skills, and experience.

7. Don’t Rely on Luck

Becoming a millionaire won’t happen by winning the lottery or because of some other unforeseen circumstance. The only way to amass $1 million or more is by diligently working to do so. Expecting luck to bring you a financial windfall will only delay the time you have to build your wealth. The money you spend on lotteries and other get-rich-quick schemes will be better utilized as savings and investments.

What’s the Difference Between a Roth IRA and a Traditional IRA?

You can claim a tax deduction for money you contribute to a traditional IRA in the year you make contributions, saving you tax dollars. But you’ll have to pay taxes on that money when you make withdrawals in retirement as well as taxes on the money’s growth.

You’re taxed on contributions to a Roth IRA at the time you make them but then withdrawals and growth on that money are often tax-free, subject to some rules that aren’t particularly hard to meet.

When Is It Better to Itemize Rather Than Claim the Standard Tax Deduction?

You’ll probably want to claim the standard deduction if the total of all your eligible itemized deductions is less than the amount of the standard deduction for your filing status. You’ll otherwise pay tax on more income than you have to. Common itemized deductions include state and local taxes, property taxes you paid during the year, home mortgage interest, and gifts made to qualified charities.

The total of your itemized deductions should be more than the $14,600 standard deduction for the 2024 tax year if you’re an unmarried taxpayer. The deduction increases annually to keep pace with inflation and it changes with marital status and other factors. For the 2025 tax year, the standard deduction increases to $15,000.

How Does Equity Build in a Home?

Equity is the difference between the current value of your home and the encumbrances against it, such as a first and second mortgage or other liens. You can build equity in your property by paying down these encumbrances, such as by making extra mortgage payments over the years.

You might also take steps to increase the value of your home—say, by remodeling—but this will cost you money out of pocket unless you’re a very capable do-it-yourselfer. You might also simply let market values increase over time.

The Bottom Line

You don’t have to win the lottery to see seven figures in your bank account. The only way for most people to retire with a million dollars is to save it up over time. You don’t have to live like a pauper to build an adequate nest egg and retire comfortably. Your million-dollar dreams are well within reach if you start early, spend wisely, and save diligently.

Fact checked by Suzanne Kvilhaug
Reviewed by Andrew Schmidt

Trumponomics describes U.S. President Donald Trump’s economic agenda, principles, and policies. Trumponomics focused on deregulation, tax cuts, protectionism, and an aggressive stance on trade. These policies aimed to promote job growth, increase wages, and boost economic growth.

Critics argued that some such policies favored the wealthy, increased national debt, and negatively impacted the environment and global trade relationships.

Another key element of Trumponomics (more specifically for Trump’s first term) consists of the policies and efforts undertaken in response to the onset of the COVID-19 public health crisis. This included stimulus payments for individuals and payroll protection programs for businesses. Trumponomics significantly impacted the U.S. economy during Trump’s presidency and remains a topic of intense debate among economists and policymakers.

Key Takeaways

• Trumponomics refers to the economic agenda of U.S. President Donald Trump, which focused on deregulation, tax cuts, protectionism, and the trade deficit.
• Trump’s tax policies, including the Tax Cuts and Jobs Act (TCJA), reduced tax rates for individuals and businesses to stimulate economic growth and job creation.
• The economic impact of Trumponomics was mixed with some success, especially in rural areas; however, no major infrastructure legislation became law.
• Trumponomics faced criticism for being protectionist, causing job losses, and giving disproportionate benefits to the wealthy and corporations, resulting in increased income inequality.

Key Principles of Trumponomics

The foundational principles of Trumponomics can be summarized as follows:

Promoting American Manufacturing

Trumponomics aimed to revitalize American manufacturing by reducing regulations, increasing infrastructure spending, and imposing import tariffs. Its goal was to create more jobs in the United States and reduce reliance on foreign manufacturing.

Reducing Trade Deficits

Trumponomics sought to reduce U.S. trade deficits by renegotiating trade deals with other countries, imposing tariffs on imported goods, and promoting domestic production. The goal was to increase exports and reduce imports.

Protecting American Workers

Trumponomics aimed to protect American workers by promoting fair trade policies, reducing immigration, and increasing job training programs. The goal was to create more American job opportunities and protect their wages and benefits.

Cutting Taxes

Trumponomics implemented tax cuts for individuals and businesses to stimulate economic growth and job creation. The centerpiece of Trump’s tax policies, the Tax Cuts and Jobs Act (TCJA), increased the standard deduction, eliminated personal exemptions, reduced the alternative minimum tax for individuals, and eliminated it for corporations. The TCJA also doubled estate tax exemptions and reduced the penalty for violating the individual mandate of the Affordable Care Act (ACA) to $0.

Deregulation

Trumponomics aimed to reduce regulations on businesses, to promote innovation, reduce costs, and increase efficiency. Deregulation can create competition by allowing more businesses to enter the market, lowering consumer prices. These factors can lead to increased economic growth.

Trade Policies Under Trumponomics

During the Trump administration, there was a focus on promoting American manufacturing and reducing trade deficits. Policies included tariffs, renegotiation of trade agreements, and focusing on bilateral trade relationships with countries like China and Japan. The administration aimed to negotiate trade deals that benefited the U.S. while protecting American workers and businesses.

These policies faced criticism for their protectionist nature, potential job loss, and unintended consequences. The imposition of tariffs and the renegotiation of trade deals disrupted global trade, threatened supply chains, and contributed to a shift away from globalization.

Tax Policies Under Trumponomics

The Trump administration introduced tax policies, including the TCJA, which reduced tax rates for individuals and businesses to stimulate economic growth and job creation. The corporate tax rate was reduced from 35% to 21%, and businesses could immediately expense the cost of certain investments.

For individuals, tax rates were reduced, and standard deductions increased. Other deductions were eliminated or capped.

The impact of the tax policies on the economy is debated, with proponents citing increased investment and job creation, while critics argue that they disproportionately benefited the wealthy and contributed to growing income inequality and the federal budget deficit.

Infrastructure and Economic Growth

Trumponomics aimed to revitalize American infrastructure to promote economic growth and job creation. The Infrastructure Initiative proposed allocating $200 billion in federal funds over 10 years.

The overall impact of Trump’s infrastructure and economic growth policies was mixed. While no major infrastructure spending packages became law, some individual policies and projects were advanced, especially in rural areas.

Impact of Trumponomics on Global Economy

Trump’s trade policies had a significant impact on the global economy. Imposing tariffs on goods imported from other countries, particularly China, led to retaliatory measures and reduced trade. Renegotiating trade deals, such as the United States-Mexico-Canada Agreement (USMCA), included controversial provisions that disrupted global supply chains and also reduced trade.

Another Trump administration priority was a “reset” of tariffs set by the World Trade Organization (WTO), which the administration said disadvantaged Americans. Finally, the decoupling of U.S.-China trade relations, as noted above, significantly impacted the global economy and shifted away from globalization.

Criticisms and Controversies of Trumponomics

Trumponomics has faced criticism for its protectionism, potential job loss, and unintended consequences based on Trump’s often erratic behavior. Critics argued that protectionist policies could lead to reduced trade and increased costs. Some economists questioned the effectiveness of trade policies and their impact on economic growth.

Trump’s war on regulations led to criticisms that these moves resulted in a stripping away of workers’ health and safety protections and resulted in lower pay. Tax cuts under the TCJA were criticized for disproportionately benefiting the wealthy and corporations, potentially leading to increased income inequality and negative economic consequences.

Trumponomics and Pandemic Response

In February 2020, the U.S. economy began to enter a recession in response to slowdowns related to the COVID-19 crisis, which then-President Trump had declared a public health emergency on Jan. 31.

In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act which aimed to soften the blow of the pandemic. It included provisions to provide stimulus payments to individuals, placed a moratorium on mortgage foreclosure and tenant evictions, boosted unemployment insurance, and erected a payroll protection program for small businesses, among other initiatives. Combined with other monetary policies, these responses under then-President Trump reduced the economic impact caused by the pandemic, including loss of economic activity and jobs. These programs were subsequently extended through later legislation as the public health crisis continued.

Future Outlook for Trumponomics

With Trump re-elected for a second term, it is a possibility that Trumponomics could be reinstated, with a continued focus on protectionist policies and reducing trade deficits. However, the effectiveness of these policies and their potential impact on the economy and income inequality will continue to be debated and discussed among policymakers and economists. The Biden administration has already taken steps to reverse some of the policies implemented under Trumponomics, such as rejoining the Paris Climate Agreement and renegotiating trade agreements.

Another potential challenge for Trumponomics is the changing nature of the U.S. economy, particularly the shift toward a knowledge-based economy and the increasing importance of technology and innovation. Policies focused on manufacturing and infrastructure may not be as effective in this new economy and could be seen as outdated or ineffective.

How Did Trumponomics Aim to Promote American Manufacturing?

Trumponomics aimed to promote American manufacturing by reducing regulations, increasing infrastructure spending, and imposing tariffs on imports to create more jobs in the U.S. and reduce reliance on foreign manufacturing. In the first three years of the Trump presidency, the manufacturing industry saw a modest increase in jobs. However, those gains fell during the COVID-19 pandemic.

How Did Tax Policies Under Trumponomics Impact Businesses and Individuals?

Tax policies under Trumponomics reduced tax rates for businesses and individuals to stimulate economic growth and job creation. The impact was mixed, with proponents arguing that they led to increased investment and job creation, while critics argue they disproportionately benefited the wealthy and corporations, potentially contributing to increased income inequality.

It’s important to note that when Trump first took office, he inherited a strong economy. In the early years of the Trump administration, job gains continued on the upward trajectory they had been on. In 2020, the pandemic saw those increases wiped out.

What Were the Potential Consequences of Trumponomics on International Trade Relationships?

Trumponomics imposed tariffs and renegotiated trade deals which raised some tensions in the context of international trade relationships. These policies could contribute to a shift away from globalization, with long-term consequences for economic growth and development.

How Does Trumponomics Differ From Bidenomics?

Trumponomics focused on promoting American manufacturing, implementing tax cuts, and reducing regulations, while Bidenomics focuses on promoting economic recovery, clean energy, and reduction of greenhouse gas emissions.

The Bottom Line

Trumponomics aimed to promote American manufacturing, reduce trade deficits, and protect American workers. The Trump administration implemented trade and tax policies with significant impacts on businesses, individuals, and the economy.

Trumponomics also had global implications, including trade tensions and occasionally provoking retaliatory tariffs from other countries. It was also controversial and faced criticism from some due to its focus on protectionism and its impact on income inequality.

Fact checked by Katrina Munichiello
Reviewed by Thomas Brock

Though it has been said that there is no such thing as bad press, there is little doubt that many organizations that have been on the receiving end of bad public relations (PR) would disagree. Rightly so, since negative press, aka, PR nightmares can hit business owners where it hurts most—right in the pocketbook.

With that in mind, we can all learn something from companies that have managed to take bad press and work through it, perhaps even spinning it so that the public views the company in a more positive light.

Key Takeaways

• Companies suffering from a public relations crisis can take different steps to mitigate the fall-out, including owning up to their mistakes.
• The rise of the internet accelerated how fast bad pr can travel. 
• Having a crisis management plan in place is important for most mid-to-large companies. 

1. Own Up

Companies should own up when the negative press is warranted because ignoring the problem is not going to make it go away. In 2014, Victoria’s Secret ran an ad campaign entitled “Perfect Body” with slim models wearing its underwear.

The campaign’s backlash was swift and furious, with calls for boycotts of the brand and over 30,000 signatures asking the company to remove this campaign. The company pivoted and rebranded the campaign “A Body for Every Body,” acknowledging that the words “perfect body” could negatively impact women with low self-esteem and eating disorders.

Owning up shows that the company is being honest and forthcoming with the public, which ultimately helps the company to restore respect in the public’s opinion. Keep in mind that a half-hearted apology—even just a hint of insincerity—can further deleterious the organization’s public image, not to mention its stock price.

2. Make Good

Beyond simple accountability, companies need to show a commitment to repairing negative fallouts. It’s even better when a company makes good on their actions without legislated to do so since this shows a corporate or social conscience on the part of the organization.

This is also important with manufacturers that have later found that some aspect of a product is defective. Offering a recall to ensure public safety results in the public retaining faith in the company’s goodwill and its desire to be regarded as honest and concerned about the public.

3. Stick It Out

Nothing is worse than when a person or organization makes all kinds of inflated promises but never actually follows through with them. Companies need to stay the course once a commitment has been made to repair faults, but that also means that organizations must be realistic and honest when making promises of what can be done to make things right.

In 2018, Nike (NKE) ran an ad supporting football player Colin Kaepernick, the football player who protested racial injustice by taking a knee during the national anthem. There was a negative backlash, including President Donald Trump and some of his supporters who felt it was unpatriotic not to stand. Nike ignored the negative backlash, supported Kaepernick’s actions, and continued to run the ads. The campaign proved to be a success.

Important

Making good with the public is extremely important for pharmaceutical companies or car manufacturers since these companies produce products that society really relies on to be safe.

4. Promote Effective Communication

Once an organization has owned up to a fault, communication should continue. Companies should allow the public to know exactly what is being done to remedy the situation, even once the initial panic has died down. The more the public is aware of what lengths an organization is going to, the more likely the organization will return to public favor, although this can be tricky.

Companies need to be mindful that no communication feels contrived. This is why it’s often best that reviews and commentaries are made by real people who are not seen as biased and in favor of the company being represented. Any advertising campaign is done once the company has started to regain momentum in the public’s eye.

Organizations need to think like consumers. How will consumers realistically find the intended information? Companies must target consumers appropriately, whether through television commercials, online advertising, press releases, participation in media interviews, publicly responding to negative reviews, or commentary on websites that allow consumers to voice their opinions.

5. Be Creative

A little creativity or a sense of humor can go a long way when dealing with negative public relations. In today’s digital world, word of mouth can travel quickly as people take to social media and various other forums to spread public opinion. Some companies have almost adopted an “if you can’t beat them, join them” mentality when dealing with negative reviews.

A pizza shop in San Francisco printed some of the negative comments posted about the restaurant on T-shirts worn by its wait staff. One of these T-shirts boasted the not-so-appetizing statement: “The pizza was soooo greasy. I’m assuming this was in part due to the pig fat.” This alludes to having a sense of humor about an organization’s negative PR.

6. Fight for Your Right

When all else fails, fight. This is especially true when the statements made about an organization are not true. Think of Taco Bell and how the composition of the meat products used in the menu offerings recently came into question amid a lawsuit claiming the company was mislabeling products.

Taco Bell stood its ground and denied all of the damaging claims—even going so far as to file a countersuit. It then allowed consumers to come in and sample a taco for free to check out the quality for themselves. This also came with the launch of an advertising campaign to get the message out that the lawsuit’s claims were incorrect. The result? The suit filed against Taco Bell was dropped.

How Important Is Transparency in Public Relations?

One of the most readily available measures that organizations can employ to either avoid or reduce negative publicity is to aim for transparency. The more the public knows about how a company operates, the less likely a consumer or journalist will have any reason to go looking for dirt. This is not to say that all companies with ethical business practices will thrive or that all companies with questionable business practices will fail. It just helps along the way if the public feels that a company isn’t doing something questionable.

Why Is Public Relations Important?

Public relations is a way for companies and high-power individuals to manage their brand. It ensures that the general public as well as customers, employees, investors, and external stakeholders continue their involvement. It is critical when there is a crisis because it can create a positive buzz and help a business or individual reconnect with the public.

What Is Public Relations in Social Media?

Public relations in social media involves creating focused, engaging, and thoughtful content that promotes a brand. This type of PR focuses on key competencies and communicates with customers by responding and reacting to social media user comments and discussions.

The Bottom Line

In our fickle society, opinions change, the news is forgotten, and the next big scandal might take the public’s mind off an organization’s mishaps. And keep in mind that no organization is ever going to please everybody all of the time. Still, the way that the general public feels about an organization’s PR disasters is ultimately determined by how the organization reacts to the allegations that have been made—true or otherwise.

Reviewed by David Kindness

The price-to-earnings ratio (P/E) is one of the most widely used metrics for investors and analysts to determine stock valuation. It shows whether a company’s stock price is overvalued or undervalued and can reveal how a stock’s valuation compares with its industry group or a benchmark like the S&P 500 Index. A good P/E for one group or sector could be a poor P/E for another sector, so comparisons should compare similar companies.

The P/E ratio helps investors determine the market value of a stock compared with the company’s earnings. It shows what the market is willing to pay for a stock based on its past or future earnings.

Key Takeaways

• The P/E ratio is calculated by dividing the market value price per share by the company’s earnings per share (EPS).
• A high P/E ratio can mean that a stock’s price is high relative to earnings and possibly overvalued.
• A low P/E ratio might indicate that the current stock price is low relative to earnings.
• An investor could look for stocks within an industry that is expected to benefit from the economic cycle and find companies with the lowest P/Es to determine which stocks are the most undervalued.

What Is a P/E Ratio?

Companies that grow faster than average, such as technology companies, typically have higher P/Es. A higher P/E ratio shows that investors are willing to pay a higher share price now due to growth expectations in the future. The median P/E for the S&P 500 was 15.04 as of January 24, 2025.

Investors use the P/E ratio to determine not only a stock’s market value but also its future earnings growth. If a company’s earnings are expected to rise, investors might expect the company to increase its dividends as a result. Higher earnings and rising dividends typically lead to a higher stock price.

Formula and Calculation of the P/E Ratio

The P/E ratio is calculated by dividing the stock’s current price by its latest earnings per share: Current price / most recent earnings per share = P/E ratio.

Earnings per share (EPS) is the amount of a company’s profit allocated to each outstanding share of a company’s common stock. It serves as an indicator of the company’s financial health. Earnings per share is the portion of a company’s net income that would be earned per share if all profits were paid out to its shareholders. EPS is typically used by analysts and traders to establish the financial strength of a company. EPS provides the “E” or earnings portion of the P/E valuation ratio.

Analyzing P/E Ratios

A stock should be compared with other stocks in its sector or industry group to determine whether it’s overvalued or undervalued. Similar companies should be compared to each other, like insurance to insurance or oil producer to oil producer.

An industry group will benefit during a particular phase of the business cycle in most cases, so many professional investors will concentrate on an industry group when their turn in the cycle is up. Remember that the P/E is a measure of expected earnings. Inflation tends to rise as economies mature. The Federal Reserve increases interest rates as a result of slowing the economy and taming inflation to prevent a rapid rise in prices. 

Certain industries do well in this environment. Banks earn more income as interest rates rise because they can charge higher rates on their credit products, such as credit cards and mortgages. Basic materials and energy companies also receive a boost in earnings from inflation because they can charge higher prices for the commodities they harvest.

Interest rates will typically be low and banks tend to earn less revenue toward the end of an economic recession. But consumer cyclical stocks often have higher earnings because consumers may be more willing to purchase on credit when rates are low.

Limitations to the P/E Ratio

The first part of the P/E equation or price is straightforward because the current market price of a stock is easily obtained, but determining an appropriate earnings number can be more difficult. Investors must determine how to define earnings and the factors that impact earnings. There are some limitations to the P/E ratio as a result as certain factors impact the P/E of a company.

Volatile Market Prices

Volatile market prices can throw off the P/E ratio, but this more commonly happens in the short term.

Earnings Makeup of a Company

The earnings makeup of a company is often difficult to determine. The P/E is typically calculated by measuring historical earnings or trailing earnings, but historical earnings aren’t of much use to investors because they reveal little about future earnings.

Note

Investors are most interested in determining future earnings.

Forward earnings or future earnings are based on the opinions of Wall Street analysts, and they can be overly optimistic in their assumptions during periods of economic expansion. They can be overly pessimistic during times of economic contraction.

One-time adjustments such as the sale of a subsidiary could inflate earnings in the short term. This complicates the predictions of future earnings because the influx of cash from the sale wouldn’t be a sustainable contributor to earnings in the long term. Forward earnings can be useful, but they’re prone to inaccuracies.

Earnings Growth

Earnings growth isn’t included in the P/E ratio. The biggest limitation of the P/E ratio is that it tells investors little about the company’s EPS growth prospects. An investor might be comfortable buying in at a high P/E ratio, expecting earnings growth to bring the P/E back down to a lower level if the company is growing quickly. But they might look elsewhere for a stock with a lower P/E if earnings aren’t growing quickly enough.

It can be difficult to tell if a high P/E multiple is the result of expected growth or if the stock is simply overvalued.

PEG Ratio

A P/E ratio doesn’t always show whether the P/E is appropriate for a company’s forecasted growth rate even when it’s calculated using a forward earnings estimate. Investors turn to another ratio known as the price/earnings-to-growth (PEG) ratio to address this limitation.

Note

The PEG ratio measures the relationship between the price/earnings ratio and earnings growth to provide investors with a more complete story than the P/E alone.

The PEG ratio allows investors to calculate whether a stock’s price is overvalued or undervalued by analyzing both today’s earnings and the expected growth rate for the company in the future.

Example of a PEG Ratio

An advantage of using the PEG ratio is that you can compare the relative valuations of different industries that may have very different prevailing P/E ratios. This facilitates the comparison of different industries that each tends to have its own historical P/E range.

Here’s a comparison of the relative valuation of a biotech stock and an integrated oil company.

These two fictional companies have very different valuations and growth rates, but the PEG ratio gives an apples-to-apples comparison of the relative valuations. The PEG ratio of the S&P 500 would be 16 / 12 = 1.33 if the S&P 500 had a current P/E ratio of 16 times trailing earnings and if the average analyst estimate for future earnings growth in the S&P 500 is 12% over the next five years.

What Does It Mean When a Company Has a High P/E Ratio?

A company with a current P/E ratio of 25, which is above the S&P average, trades at 25 times its earnings. The high multiple indicates that investors expect higher growth from the company compared with the overall market. A high P/E does not necessarily mean a stock is overvalued. Any P/E ratio should be considered against the backdrop of the P/E for the company’s industry.

What Is a Sector?

A sector is a general segment of the economy that contains similar industries. Sectors are made up of industry groups, and industry groups are made up of stocks with similar businesses such as banking or financial services.

What Is a Relative Valuation?

A relative valuation is a mathematical way of determining whether a specific stock or a broad industry is more or less expensive than a broad market index such as the S&P 500 or the Nasdaq.

The Bottom Line

The price-to-earnings (P/E) ratio is one of the most common ratios that investors use to determine if a company’s stock price is properly valued relative to its earnings. The P/E ratio is popular and easy to calculate, but it has shortcomings that investors should consider when using it to determine a stock’s valuation.

The P/E ratio doesn’t factor in future earnings growth, so the PEG ratio provides more insight into a stock’s valuation. The PEG is a valuable tool for investors in calculating a stock’s future prospects because it provides a forward-looking perspective. However, no single ratio can tell investors all they need to know about a stock. It’s important to use a variety of ratios to arrive at a complete picture of a company’s financial health and stock valuation.

Every investor wants an edge in predicting a company’s future, but a company’s earnings guidance statements may not be a reliable source.

Fact checked by Suzanne Kvilhaug
Reviewed by Margaret James

What Is Fair Market Value?

Anyone who has ever tried to purchase or sell a home will be familiar with the significance of a property’s fair market value (FMV). FMV is the price that a property would sell for on the open market under usual conditions. Thus, the FMV is significant to those who own a property, as well as those who must pay taxes on that property. Taking a property-based deduction requires determining the FMV. The term is also widely used in the real estate investment market.

Unfortunately, there is no easy or universal way to determine market value for real estate. However, nearly every market valuation comes down to two factors: real estate appraisals and recent comparable sales.

Key Takeaways

• The fair market value is the price a home would sell for on the open market under normal conditions.
• Fair market value (FMV) is often different than actual market value or the appraised value and is used in some property tax evaluations.
• Guidelines on how to fairly evaluate a property’s value are spelled out by the Internal Revenue Service (IRS).

The Economics of Market Value

The value of every good in a market economy is based on a price discovery process. Producers and resellers propose hypothetical values and hope to find buyers with similar valuations. In contrast, consumers bid up or push down prices based on their changing interpretations of the value of goods. This process is imperfect and ever-changing.

For the real estate market, a buyer must value a property higher than the amount they are willing to trade for that property. At the same time, the seller must value the property at a price below the money offered. Of course, the supply and demand for a home in a given region will play into these economic evaluations, as well as the state of the broader economy in terms of GDP growth, unemployment, and inflation.

Appraisals and Comparable Sales

An appraisal is a professional opinion of value. During a home sale, the bank that offers the home loan will typically select an appraiser to render an opinion about the value of real estate as of a specific date.

Comparable sales, also known as the “market data” approach, is the most common way to arrive at market value. Here, the recent sales of properties of similar stature are reviewed to inform judgment. If prices of recently sold homes that generally match the same criteria as your own (e.g., in terms of size, number of rooms, amenities, etc.) are high, you are likely to also get a more favorable appraised value. Note that the appraised value may end up being quite different from the actual sale price in the market.

IRS Publication 561

The governing tax code publication for the fair market value of real estate is IRS Publication 561. This publication addresses all types of property valuations including cars, boats, collections, used clothing, securities, patents, annuities, and many others. But it does not set aside a section for determining real estate market value.

Publication 561 explicitly states “a detailed appraisal by a professional appraiser is necessary” for proper valuation. Three approaches are considered acceptable by the appraiser: the comparable sales approach, capitalization of income approach, or the replacement cost new method.

Comparable Sales Approach

The comparable sales approach compares a property to other properties with similar characteristics that have sold recently. This method takes into account all the features of the property, for example, its size, the number of bedrooms, and the effect that individual features have on the overall property value.

Capitalization of Income Approach

The capitalization of income approach values an investment based on the expectation of future benefits. This method relates the property’s value to the market rent that it can be expected to earn and to the resale value.

Replacement Cost New Value Approach

The replacement cost new value method determines the current cost of constructing a property with the same utility using current construction materials and adhering to current design standards and layouts.

Warning

Discriminatory practices within the home appraisal profession are illegal.

Mortgage lending discrimination is also illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).

What Are Most Houses Selling for?

The median sales price of houses sold in the United States was $420,400 for Q3 2024, according to the Federal Reserve Bank of St. Louis.

How Can I Check My Current Home Value?

Though there are online tools that allow you to estimate your home’s current value, the most accurate assessment is via an appraiser.

How Do You Find the Value of Property?

The best way to find the value of your home is by hiring an appraiser.

The Bottom Line

Regardless of how you value a property, at the end of the day, the amount of money received for a home will be negotiated between a buyer and a seller. Each party may use valuation techniques to help argue their case, but a deal is typically reached with some compromise.