Sign up for our free daily newsletter
Get the latest news and some fun stuff
in your inbox every day
Josh Brown wrote a passionate article about being too focused on PE ratios, especially in light of the AI boom we are currently witnessing. It's a fun read if you have a few minutes to spare.
He uses the example of Netflix back in 2009, who were launching a disruptive new streaming business. Josh notes that between that time and early 2020, Netflix traded on an average PE ratio of 165 times earnings. Over that period it returned 6570%.
His point is that you cannot just focus on where a stock trades relative to its current earnings. Lots of great investments were never cheap. In our portfolios, Tesla, Amazon, and Nvidia are also good examples.
Many investors fall into the PE trap. It's a good barometer for value but far from the full puzzle. You have to look at the bigger picture and try to determine whether the business can be much larger in years to come.
