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What If 1,000x Earnings Was a Bargain?
Published about 2 months ago • 4 min read
Here's your weekly helping of interesting investing information and insights.
Opinion
The P/E ratio has probably scared more investors out of more great companies than any bear market ever has.
It’s happened to all of us, and this will 100% shift your mindset.
And if you have no idea what the hell a P/E ratio is, it's actually pretty simple.
A P/E of 15 means you're paying $15 for every $1 a company earns. The market's historical average is around 15-20x. So when something shoots way above that, people think it’s “too expensive”.
But here's the dirty little secret — the P/E only tells you about the past and nothing about the future.
So the only question that actually matters isn't "Is this expensive today?" It's "Will this company be worth more in 10 years?"
But most investors never ask that question.
We miss some of the greatest companies of our lifetime while waiting for a "better price" that never comes.
I’ve made that mistake a few dozen times!
Check out this crazy P/E story about Google (now Alphabet), which went public in 2004 at 207x earnings.
Many experts called it overpriced and advised staying away.
But what if you ignored them — and paid 1,000x earnings? Nearly 5x the already "nosebleed" IPO price?
Your $10,000 would be worth over $300,000 today!
Alphabet (GOOGL) stock price
The valuation wasn't the risk. Missing the company was.
But what about our beloved Oracle of Omaha and his favorite sugar water company?
Warren Buffett first bought Coca-Cola (KO) in 1988 at a fair price.
The business kept growing, and the stock soared. By 1998, the P/E hit 50x — what Buffett himself called a "very silly price," and later admitted he probably should have sold.
Then the stock got cut in half over the next five years, falling from $43 to $18.
Coca-Cola (KO) stock price
But the business never stopped selling billions of drinks, and its dividend never stopped growing.
Anyone who sat on their hands and held on now owns a stock at $77 that Buffett bought for $3.25 — and he collects $850 million a year in dividends alone.
He gets his entire original investment back every 18 months!
Even though I know better, I struggle mightily with this too.
I love Costco (COST) because it's one of the best-run companies in America, and we drop hundreds of dollars there every month.
But the P/E is 52x, and my brain still tells me to wait for a better price.
Costco (COST) Stock Price
So I’m thinking about the only question that matters:
Will Costco be worth more in 10 years than today?
If yes, the smart move is to hold my nose, buy, and sit on my hands for years.
The P/E ratio is a snapshot of today and not a crystal ball.
But a great company with growing sales, growing profits, and shrinking share count?
Like the law of gravity, the stock price almost has to follow higher.
Next time a stock "looks expensive" — don't ask what it costs today.
Ask what it'll be worth in a decade, because: Future growth > Today's math.
What I'm Reading
Dividendology has a hot take on REITS and why the game has completely changed now that interest rates are falling. It breaks down exactly which real estate stocks are moving from "just surviving" to "massive winning" and how you can grab a piece of the action! [Link to article]
Tracey Ryniec talked about Buffett's Lieutenant, Ted Weschler, and his tips on how he built a multi-million dollar ROTH IRA using only publicly traded stocks. He didn't even use pre-IPO investments like Peter Thiel did, so it's a process that anyone of us can use... pending you have 30+ years!
Disclaimer: This is not investment advice. Do your own research before making any investment decisions.
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