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Off2Explore writes:
Why is everyone dinging the author for recommending bonds over stocks? He may be a bond guy, but he clearly states at the bottom of the referenced article that *neither* bonds nor stocks is going to produce anything like the returns we saw from the 1990's for the foreseeable future. I'd hardly call this an "axe to grind"; he notes that currents yields on Treasuries are awful! The only solution is to save more and live with lower returns. (When I run the RE spreadsheet, I've been using figures like 4% inflation and 8% nominal return.)

Personally, I am following the Eurotrash01 route in my taxable account; carefully hand-select stocks by their numbers. And I can tell you that most of the stocks that are passing my informal screens are stuff that most of us have never heard of, not the flashy well-known names that were all the rage in the 90's. If you haven't looked, you'd be surprised how many stocks are trading at P/E's in the vicinity of 10. Not all are good investments, so be sure to dig deeper than the simple PE. But right now I wouldn't touch _any_ stock over a PE of, say, 25. I cashed out all of my Cisco, Intel,and Nokia in order to move the money elsewhere.

My Roth IRAs are almost entirely Berkshire Hathaway at this point. 401K's are a problem because I can't trade them individually the way I do my other accounts.

ptsurmr responds:
You are aware that the PE of BRK is somewhere around 38 to 46 (at BRK.A is listed as 38, BRK.B is listed as 46)?

Perhaps there are occasions where the PE alone is not sufficient to make a sell/no buy decision?

Off2Explore replies:
Actually, it's so hard to compute the intrinsic value and meaningful earnings for BRK, I would seriously question that 38-46 figure. I see much lower values kicked around on the BRK board. In any case, BRK is such an odd case that it defies conventional rules.

"Perhaps there are occasions where the PE alone is not sufficient to make a sell/no buy decision?"

As I stated in the article you just quoted:

" sure to dig deeper than the simple PE."

Still, don't underestimate the difficult of showing gains going forward when starting from an astronomical PE. Take Nokia, for example; it's a fantastic company and I like everything about it except the price at which it is currently trading. Given realistic projections for its earnings growth going forward, it's way overpriced (though not as much as it was when I sold it).


Surely you can see how a reasonable person might be confused with you stating, on the one hand, that you "wouldn't touch _any_ stock over a PE of, say, 25. I cashed out all of my Cisco, Intel...", and on the other hand, telling us that your Roth IRAs are "almost entirely" in a stock with a PE listed as 50 - 90% greater than 25?

Note that BRK has a PE of nearly twice INTC (PE = 22, plus pays a small dividend, unlike BRK)

I agree that PE (as publicly defined and reported) may not be a good measure of BRK's value. You obviously do to, since you own it but indicate you wouldn't touch a stock with such a PE. Just maybe there are other companies out there with a PE of greater than 25 that are stocks to own too?

You are correct when you state you mention to "...dig deeper than the simple PE". However, you misrepresent the original context of your statement. The original context was after having discarded all stocks with a PE of "say, 25". In other words, the logical interpretation is that you a) would not "touch" any stock with a PE > 25 and b) even if the stock had a PE lower than 25, you would only touch it with due diligence.

Given the context, I do not get how this comment adds any insight into the apparent contradiction I was asking you about. Thus I do not get why you restate it in explanation for your earlier position.

I am not arguing any one stock is better than another, nor do I "underestimate the difficult of showing gains going forward when starting from an astronomical PE". I am just trying to understand the seeming contradiction where on the one hand you describe a process that discards from your "touch" the entire universe of stocks with a PE > 25. You then take what is left and perform due diligence on the remainder to find good picks (to buy or keep). Holding BRK seems, deductively, to be at odds with this statement.

I personally do not think there is any single metric, PE or otherwise, for which it is safe to say I will not touch _any_ stock in violation thereof. It seems as though you are conflicted in this regard, despite your original assertions otherwise.


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