A: Google is one of those stocks that teaches investors one of the harshest lessons about the market: The worst time to buy a stock is when other investors are most excited it about.

Yes, I know, it doesn't seem to make sense. When a company's prospects are brightest, the management is optimistic and investors are enthusiastic, that can be a bad time to jump in.

The reason is simple: When everyone wants to buy a stock, they drive the price up, all but dooming subsequent investors to subpar returns. And even a good company's stock can be overvalued.

You say you bought Google few months ago. Unfortunately, just a few months ago, Google was a stock that could do no wrong. Investors were piling into the stock and even TV's James Cramer told investors to jump on. Cramer told investors on Jan. 14 that tech was still the place to be and said Google would go to $750, according to Youmoneywatch.com. The stock was trading for $653.82 at the time.

That turned out to be deadly advice and another warning that following the herd is a bad idea. As you've seen, the stock has lost a third of its value.

But let's look at the stock with a fresh analysis and put it through the four steps we put stocks through:

Step 1:  Risk vs. reward. When you take a risk on a stock, you want to make sure you're properly rewarded. Downloading Google's trading history back to 2004, we see the company generated an average annual compound rate of return of 24%. That is an outstanding return if you consider the Standard & Poor's 500 returned more than 3.9% annualized over the same time period.

But to beat the S&P 500, you accepted very high risk — standard deviation — of 54.6 percentage points. That's 513% greater than the S&P 500's risk during the same period. While Google investors have enjoyed great returns, the risk has been much higher than that return. That risk, and wild swings in market value, are why you're asking me this question.

Step 2:  Measure the stock's discounted cash flow. Some investors decide if a stock is pricey by comparing its current price to the present value of its expected cash flows. It's a complicated analysis made simple with a system from NewConstructs. When we run Google's stock, we find it's rated "neutral." In other words, the current stock price is roughly equal to what the company is expected to generate in cash over it's lifetime. Using this analysis, it would appear Google's stock is priced fairly. It's not cheap, but it's not expensive either.

Step 3:  Compare the stock's current valuation to its historical range. BetterInvesting's Stock Selection Guide can help. If the company can increase earnings 35% a year over the next five years, as analysts expect, that would put the stock in the "buy" range. That's a green light for investors who believe the price-to-earnings ratio will return to historical norms.

Step 4:  Check the company's financial health. Before investing in any company, you want to make sure it's in good financial shape. A quick way to check is to look at where it falls on the USA TODAY Stock Meter, which ranks stocks from conservative (1) to aggressive (5). Google scores a healthy 2.4 here. You can get a Stock Meter score for almost any stock by going to money.usatoday.com and putting the stock's ticker symbol or company name into the Get a Quote box.

The bottom line?

By many measures, Google look good at the current price. However, based on your question, you might want to look closely at how poorly Google fared in the first test: risk versus reward. Yes, Google's stock may be lucrative and do quite well. But there will be times like these that you will need to withstand incredible volatility. If that's a problem, perhaps this isn't the right stock for you, and something less wild might be more appropriate.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.

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