Subject: Re: OT: big companies
Um, nope, not buying it. It's not different this time.
I agree that it's not different this time. The fact that P/E ratios, by themselves, are useless for valuing high-growth companies was known back in the 1ate 1970s. That was when Peter Lynch took over the reins at Fidelity Magellan and delivered an astounding 29.1% annualized return for his investors from 1977 through 1990. A $10,000 investment in the Magellan Fund would have grown to $280,000 during the 13 years Lynch ran the fund. As he explains in his classic book One Up on Wall Street (which I recommend you read), Lynch decided long ago that P/E ratios were not useful for deciding when to buy growth stocks. He used the PEG ratio ratio instead, but his most important criteria was to "buy what you know".
So you are correct that it's not different this time. P/E ratios were useless for valuing growth stocks in the 1970's and they are still useless for valuing growth stocks 50 years later.
If you pay today over 15 times what the earnings turn out to be a decade later, you'll have a poor return with very high probability. ... The valuations will fall to earth with 100% certainty; the only question is the time frame.
100% certainty? Really? What would you say if I told you that in the 26 years that Amazon has been publicly traded that it has never traded at a multiple lower than 20 times earnings? The same is true of Dow member Salesforce.com whose lowest P/E ever was 48. $10,000 invested at Amazon's IPO would be worth over $16 million today. And $10,000 invested in Salesforce's IPO nineteen years ago would be worth $570K today. Even during the Great Recession of 2008, you had to pay 96 times earnings to get a share of Salesforce. So what? You have to pay up for the type of revenue growth that Salesforce delivered. If you're curious, that company under Mark Benioff grew from $5M to $100M in revenues in only 2 years from 2001-2003, and then went on to generate $1 billion in revenue in only 6 years. I can give you many other examples where you could retire rich from these market-dominating growth stocks without their P/E ratios ever "falling to earth".
Now, this is the Berkshire board, and I think that Buffett is running a fine company. If you're an investor in BRK.[A or B] I support that. Good for you. What I object to is the constant assertions over the years that the S&P 500 was overvalued relative to Berkshire. Those assertions were just plain wrong. Let's look at the annual return numbers over the past 5, 10 and 15 years. Easy to do using PortfolioVisualizer.com.
Annualized return
5 yrs 10 yrs 15 yrs
------------------------------------
S&P 500 12.3% 12.8% 10.9%
BRK.B 12.8% 11.8% 10.1%
If index funds were "overvalued" relative to Berkshire 10 years and 15 years ago, why has the index beaten BRK.B over those time periods? Yes, the S&P 500's P/E ratio back in 2013 was much higher than Berkshire's but this just shows that trailing P/Es are faulty measuring sticks for gauging forward returns.
If you're in your wealth-building years, and especially if you're a Millenial or Gen Z, ignore these assertions about the market being overvalued. These claims have been made many times ad nauseum over the years, but they've mostly turned out the be wrong, as the above figures show. The best way to reach your retirement goals is to save 10% of your income into a Vanguard-type index fund in your 401K. Put that investment plan on autopilot, focus on your career and have some fun with your hobbies. Your youth is a very precious time in your life.