What's up everyone,
People seem to think the PE ratio is not important anymore. Everyone is about these "growth" stocks and what not. Let me just say this - and I know Warren Buffet, Charlie Munger, and Ben Graham will agree with me: if you long companies that are trading well past a 20 PE ratio, you are SPECULATING.
I have no problem whatsoever with speculating and I've made almost all of my money speculating and not investing, but many people have been buying AMZN thinking it's a wise investment. It is not a wise investment. "Growth" is not an investment strategy. If you don't know what you are doing, you''ll get smashed. You should be TRADING the growth companies, not investing in them. Today's "growth" company is tomorrow's "shrink" company. You can quote me on that.
In the first post I shared with you all covering AMZN, I told you that my father who had a $100,000 position in AMZN was very bullish at $1840 and I told him to sell and he did. It went up to $2,000 and he was becoming skeptical of my skills, but I was never going to be wrong about this. I have saved him far more than he would have earned holding it at this point. I only had to look at one thing to know you should not be holding this stock and the one thing was the PE ratio. It was 300 at the time. Earnings in the next report literally doubled. So, it then went to 150. Big deal, even if earnings 4x it's still a joke.
There is just no way you can invest in companies that trade that high above their earnings. Let's think about why. Investment is about three things: risk, reward and time. The idea of the PE ratio is ubiquitous in every investment vehicle because it encapsulates all of these ideas. If you are trading at a 200 PE ratio, that means at that current price, to double your money, you'd have to wait for 200 years (it's a little confusing when there's no dividend, but it's still how it works in theory).
In income producing real estate, there is the CAP ratio which is the same thing as the PE. It's some multiple of the net operating income. A CAP is usually 8-12. A PE is usually 16-24. Now, why might that be? Well, the reason people are willing to pay a higher multiple for stocks is because they don't have to do anything to make the money. Someone else is doing it for them. Whereas in real estate, you need to invest in the property regularly and make sure you are keeping it in good shape and run a business. It's a lot of work. That's why people don't want to wait as long to make their money back on the investment.
This is how investment works and anyone who says the PE ratio is a joke for average investors is a fool. When AMZN has a 200 PE that means people are willing to pay that much because they are EXPECTING unrealistic returns over time. Now this is a simple question: why might it be unwise to expect the unrealistic?
Hope you learned something.
-YoungShkreli
People seem to think the PE ratio is not important anymore. Everyone is about these "growth" stocks and what not. Let me just say this - and I know Warren Buffet, Charlie Munger, and Ben Graham will agree with me: if you long companies that are trading well past a 20 PE ratio, you are SPECULATING.
I have no problem whatsoever with speculating and I've made almost all of my money speculating and not investing, but many people have been buying AMZN thinking it's a wise investment. It is not a wise investment. "Growth" is not an investment strategy. If you don't know what you are doing, you''ll get smashed. You should be TRADING the growth companies, not investing in them. Today's "growth" company is tomorrow's "shrink" company. You can quote me on that.
In the first post I shared with you all covering AMZN, I told you that my father who had a $100,000 position in AMZN was very bullish at $1840 and I told him to sell and he did. It went up to $2,000 and he was becoming skeptical of my skills, but I was never going to be wrong about this. I have saved him far more than he would have earned holding it at this point. I only had to look at one thing to know you should not be holding this stock and the one thing was the PE ratio. It was 300 at the time. Earnings in the next report literally doubled. So, it then went to 150. Big deal, even if earnings 4x it's still a joke.
There is just no way you can invest in companies that trade that high above their earnings. Let's think about why. Investment is about three things: risk, reward and time. The idea of the PE ratio is ubiquitous in every investment vehicle because it encapsulates all of these ideas. If you are trading at a 200 PE ratio, that means at that current price, to double your money, you'd have to wait for 200 years (it's a little confusing when there's no dividend, but it's still how it works in theory).
In income producing real estate, there is the CAP ratio which is the same thing as the PE. It's some multiple of the net operating income. A CAP is usually 8-12. A PE is usually 16-24. Now, why might that be? Well, the reason people are willing to pay a higher multiple for stocks is because they don't have to do anything to make the money. Someone else is doing it for them. Whereas in real estate, you need to invest in the property regularly and make sure you are keeping it in good shape and run a business. It's a lot of work. That's why people don't want to wait as long to make their money back on the investment.
This is how investment works and anyone who says the PE ratio is a joke for average investors is a fool. When AMZN has a 200 PE that means people are willing to pay that much because they are EXPECTING unrealistic returns over time. Now this is a simple question: why might it be unwise to expect the unrealistic?
Hope you learned something.
-YoungShkreli