P/E Ratios Lie. Here's What You Should Be Looking For

Let’s talk valuation! Not the sexiest topic at the dinner party, but arguably the one that keeps your portfolio from slipping into polyester-suit territory.

If you’ve been in the game as long as I have— 30+ years of WSJ news, spreadsheets, decisions good and bad, and countless recessions and other dips— you know that valuation is a compass, not a map. It doesn’t tell you where the market’s going, because nothing and no one can do that. Valuation is supposed  to tell you whether you’re about to overpay for a beater or snag a classic at a fire-sale price.

But here’s the rub: the old-school quick check of valuation, the Price-Earnings ratio, doesn’t always tell you what you need to know. And a high P/E isn’t always a harbinger of doom. Sometimes that just means the market is seeing what you haven’t— like real growth, fat margins, and a competitive moat wide enough for an aircraft carrier. 

Have a look at Nvidia. You could’ve bought it in 2018 at an already-rich multiple and still made out like a bandit in the time since. Why? Because the fundamentals backed it up: mobile gaming chips, plus data centers, wrapped in silicon glory. Valuation looked expensive only if you assumed the future would look like the past. But then came the AI revolution; Nvidia put itself out front and has managed to stay there. In 2018 the best days were still ahead of it.

On the flip side,  are you old enough to remember GE? In the 90s and early 2000s General Electric was the bluest of blue chips, priced like it could do no wrong— until it did. Valuation metrics told a story, but investors never saw the rot under the hood. Today GE is a shell of its former self. That’s the catch: just like an “expensive” stock might still accelerate into the stratosphere, a “cheap” stock might be cheap for a reason.

Valuation, in practice, is about context. A 25x multiple on a company growing 30% per year isn’t pricey, it’s rational. But a 12x multiple on a company with low single-digit growth, rising debt, and a boardroom full of aging boomers? That’s a value trap and should come with a warning label.

What I try to tell my readers in this esteemed collection of caffeine-fueled musings is to focus on quality. Yes look at earnings multiples, but also look at return on equity, R&D spending, the moat, investor perception of the brand, and whether management knows what it’s doing. And if you can’t understand how the business makes money, do yourself a favor and skip it. 

We are living through a moment of investing noise: trade wars, meme stocks, 24-hour financial TV, AI bubbles, on-again off-again inflation, TikTok investing advice, finTwit screamers. A long-term investor should treat valuation as a lens, not a filter. You want to know whether the story checks out, and not disqualify a company just because its numbers make you squirm at first glance.

Many of the best investments I’ve made weren’t “cheap.” They were often misunderstood (Amazon showed effectively zero profit for two decades because they poured it all back into growth), under-appreciated (Apple’s hardware and software was always just a titch better but it hadn’t found its magic sauce), or simply too long-term for the quarterly crowd to bother with (Netflix was never about mailed DVDs; that was merely their opening move). And guess what? Compound interest doesn’t care about headlines.

What happens when you buy and hold. Mostly.

Below is a recent podcast from the Motley Fool featuring founder David Gardner. Hear what he says about stock prices when making a buying decision. 

David Gardner: What Rule Breakers Value

So the next time someone tells you not to buy a stock because it’s too expensive, smile politely while they sip their designer cocktail, and ask them how they feel about paying up for quality. Because you usually get what you pay for ... unless you're buying WeWork. Then you’re just paying for air.

You’re More Like Warren Buffett Than You Think

Individual investors have an edge even if some don’t use it

By 

Spencer JakabMay 5, 2025

Warren Buffett at the world premiere of the HBO film ‘Becoming Warren Buffett’ in 2017. PHOTO: NANCY KASZERMAN/ZUMA PRESS

Suggesting you can invest like Warren Buffett sounds crazy.

The man has been an epic compounding machine, turning a dollar invested at the start of his professional career into about $365,000 today. Buffett’s ferocious intelligence, preternatural patience and long run—during a great time to own U.S. stocks—make it basically impossible for anyone else to match his record.

But, compared with professional investors, it is much easier for a little bit of that magic to rub off on your portfolio. Buffett was never about making a quick buck, and everyday investors can play the same long game.

The fact that Buffett wasn’t a portfolio manager, strictly speaking, after the late 1960s gave him incredible freedom. He made concentrated bets like Coca-Cola and Apple. He ignored critics who said he had lost it, such as during the tech bubble. He shrugged when flash-in-the-pan managers like Cathie Wood were anointed the “new Warren Buffett.”

It hasn’t just been a straight ride higher. During his six-decade run atop Berkshire Hathaway, Buffett has trailed the market a third of the time and lost money in 11 years. It surely bothered him, but much less than it would a pro fund manager facing career risk. Likewise, he never faced pressure to own the Nifty Fifty, Cisco, Nvidia or other fashionable stocks.

An attendee at the Berkshire Hathaway annual meeting Saturday. PHOTO: BRENDAN MCDERMID/REUTERS

It is well known that 90% of mutual-fund managers will lag behind their benchmark over a decade. Less known is that investors in their funds do even worse, trailing their return by 1.1 percentage points, on average, according to Morningstar. On the other hand, a value-stock portfolio—those in the waters where Buffett has fished—has beaten the broad market by an average of 2.7 percentage points a year over the decades.

Not only don’t you have to cave to the pressures faced by the pros. You also can buy and hold the dull stocks, or index funds owning them, while ignoring the market’s fads and gyrations.

Consider two 21-year-old college graduates who each save $3,000 a year until they turn 65. One succumbs to typical emotional-timing errors and return-chasing behavior. The other instead captures just half of the long-run value premium that enhanced Buffett’s returns (it isn’t what it used to be). 

Assuming a market return of 8% for a stock-and-bond portfolio, the typical investor would have $835,000. One who allowed a bit of Buffett’s patience and teachings to rub off on her portfolio would have $1.75 million on retirement day.

Berkshire’s retiring CEO hasn’t just been a giant of the professional investing world—he’s a giant among pygmies. You can’t be Buffett, but being just a little bit like him can leave you towering over pros and other individuals alike.

Write to Spencer Jakab at Spencer.Jakab@wsj.com

Blood on the Street: Blair duQuesnay

Blood on the Street

Blair duQuesnay

I won’t sugarcoat it. This is bad. 

On Wednesday, President Trump stepped up to the podium in the Rose Garden and announced ‘reciprocal’ tariffs to be charged on goods imported from every trade partner in the world, and then some. In an event he called “Liberation Day,” the President presented his list of tariffs on a poster board reminiscent of a middle school science fair project. The announcement and Trump’s multi-decade belief in tariff policy were widely publicized and anticipated. However, the staggering size and scope of the tariffs were far beyond what market participants could have imagined in their wildest dreams. 

The markets spoke to this shock. US stocks were in free fall on both Thursday and Friday. The S&P 500 Index lost 10.5% over two days. The Nasdaq 100 lost over 11%. It was the fourth worst two-day stretch for US stock markets since 1950. I won’t sugarcoat it. This is bad. 

Source: YCharts. Weekly share price performance of the largest 25 US stocks

What is a long-term investor to do? 

Refrain from decisions made based on emotions. No good investment or trading decision ever comes under heated emotions. In times of fear, your brain latches on to negative information. It is easy to rationalize that things will get much worse for markets before they improve. They likely will, but here’s the thing ….

There are no magical strategies to avoid the pain. I wish I could tell you there’s a way to prevent the pain while still earning market returns. It is the most natural reaction in the world to want to do this. We know things are bad now, so why not sell out and wait for the smoke to clear? Because you have two chances of being wrong - when to sell and when to buy back in. It’s buying back in, which is harder. The market doesn’t wait for the news to get better. When the news improves, it’s too late. COVID is the perfect example. The stock market rally began in April 2020, long before the COVID death rate peaked and years before life returned to normal. 

But this one is different. Every market sell-off is different. This isn’t my first rodeo, but it is the first self-inflicted and completely avoidable one. That is hard to reconcile. But so was the global pandemic that shut down the economy and the financial crisis that left the entire global banking system bankrupt on paper. The difference is that we know how past crises ended. We see they were amazing buying opportunities. It absolutely did not feel that way at the time. This crisis will also end. 

Give yourself a pressure release valve. Everyone learns their true risk tolerance in a crisis. If you need to do something to release the pressure or sleep at night, consider more minor changes. Perhaps you can raise enough cash to cover a year of expenses and put it in a high-yield savings account. Or you can reduce your stock exposure from 80% to 60%. By all means, do something at the margins, but don’t sell out. 

Invest Cash on the Sidelines. No one knows how long this will last or how deep it will be. But the best time to buy stocks is when they scare you the most. The data supports this. Potential returns in the next 1, 3, and 5 years increase as the selloff grows. If you have cash intended for long-term investment, now is the time to start putting it to work. You do not need to go all at once. Divide it into 1/3rds or 1/4ths and devise a plan to invest it over time or at key market levels. 

Make a plan to rebalance. If you don’t have cash on the sidelines, there is still a way to take advantage of lower prices. Hopefully, you have some bonds in your portfolio. Calculate how far your allocation has moved from its target. Define a level at which you will sell bonds to buy more stocks. Will it be when your portfolio is 5, 10, or 20% off balance? The best time to plan is in advance. Then, stick to your plan no matter what. Discipline is probably the most important skill for the long-term investor. 

No one knows the future. Not even the smartest pundits on TV. This crisis could end on Monday or stretch for years as an escalating trade war and global recession. Long-term investing requires optimism about the future. Companies will find a way to produce the goods and services we want and need and sell them at a profit - no matter how the new rules shake out. Your success never required knowing the future - only your fortitude to stick to your plan. Dorothy didn’t need the Wizard of Oz to take her home to Kansas. All she had to do was click her heels. 

Take a deep breath. This could go on for a while. Settle in. Find whatever coping mechanisms work for you. I recommend turning off the TV and reducing your overall news consumption. I heard FoxNews took the market ticker off their screens mid-day on Thursday. Investment returns are earned, not given. I am reminded of one of my all-time favorite investing quotes: 

In bear markets, stocks return to their rightful owners. —J.P. Morgan himself

A Calm Voice & A Steady Hand: Revised Edition

In 2016, I wrote a column detailing the voices I listen to. The individuals in and around the investing universe who I found provided consistently good advice in times of scarcity and in and times of plenty. These were the folks I learned my craft from, who guided my best instincts and who steered me around the biggest potholes. These authors, bloggers, podcasters, journalists and corporate leaders made what I do possible. 

In the intervening years, we've lost a number of them: to retirement and to red-pill rabbit holes; one died, another changed things up; a few, in retrospect, were on a long hot streak in 2016 which summarily ended. And then President Trump's tariffs sent the markets off a cliff for absolutely no reason at all— beyond a misguided understanding of global trade economics plus an infantile need to scare every kid on the playground into handing over their lunch money. Corporations around the world who operate in the US or do business with the US (who doesn't?) are trying to get a handle on severe changes in their cost projections and revenue impacts. Investors everywhere are panicking and stocks are cratering like it’s March 2020. 

So it was time to update my list of the most trusted voices in finance, and to update you as well. (Sadly, and this can't be good: they're nearly all white men! No doubt this limits me and my perspective. I need some new voices.) Most of the rest of the column has remained true even with nearly a decade of perspective; I left it alone. I hope you can find something useful here in your journey. 

    ___________________________

In my twenties, at a time when my marriage was new, my career was stalled and my father’s illness was worsening, I was fortunate to get to know a gifted man. He was a spiritual leader and a counselor, and among his talents was a rare ability to soothe, with kind eyes and a soft voice. When he looked at me, for that moment I was his universe and I felt completely safe. I'm sure he was a wonderful counselor.

The markets lately have been a roller coaster from hell, all big drops and loops and fast hairpin turns, not a single steady climb to be seen. A little soothing and a sense of security would be welcome. 

As I’ve said in previous posts about studying the market and where investing ideas are born, I like to read about business. Clever and observant writers give me most of my ideas not only about what to invest in, but about how those businesses are performing, who they partner with, what their leaders are up to, how they stay competitive, what products are coming down the pipe, and on and on. 

And I’ve mentioned before who I read. But it’s not just academic: these individuals offer analysis, experience, wisdom and also something else— in difficult market moments, these people are the cool and steady hand on the wheel. They reassure me. They remind me that no matter how far the broader market falls, no matter the beating I take on my positions, it will come back. That I’m playing the long game, measured not in quarters or even years but in decades. That no market rout which lasts a few weeks or months can shake my foundational belief that over time, the market rises. Without them, I am lost, sleepless, panic-selling into a dropping market.

In no particular order, with links to their work where applicable:

David Gardner & Tom Gardner: The Motley Fool investment advisory, analysis and podcasts

David and his brother Tom founded the Motley Fool in the mid-90s following a remarkable personal stock picking run, and they continue to run the advisory and wealth-management firm today. David prefers smart, disruptive, low-capital businesses with huge potential, which he buys early and holds for 5 years or more. Tom is the slow-and-steady, more conservative investor, buying established business for long-term gain. Their returns (and their firm!) have performed extraordinarily over the last 3+ decades, and their podcasts and appearances across Motley Fool media teach the rest of us how replicate them in a fun and approachable way. I also recommend their books, which absolutely got me started: Motley Fool Investment Guide; Rule Breakers / Rule Makers, etc

Barry Ritholtz, Ritholtz Wealth Management and Bloomberg Business: The Big Picture blog

A seasoned money manager and award-winning journalist, with a clear 10,000-foot view of what’s happening and why you should care. Barry's new book, How Not to Invest, about avoiding mistakes, is everywhere as he's doing his promotional book tour. In fact I just republished his recent post about the tenets of his book. Barry also hosts the Masters in Business podcast series for Bloomberg, offering excellent long-form interviews with the individuals who move markets. 

Morgan Housel, The Collaborative Fund: Morgan Housel Podcast, Blog

With a deep understanding of markets, the economy and history, as well as the investor psychology, Morgan stands alone. he's written two brilliantly helpful and accessible books about your money and investing: The Psychology of Money and Same As Ever. He has an ability to simply reframe complex concepts and make the technical totally understandable. He has his own blog, posts a regular column on The Collaborative Fund website and is a contributor on the Motley Fool podcast series.

Tadas Viskanta: Abnormal Returns daily email of relevant links and blog

An investor, blogger and author, Tadas operates AbnormalReturns.com, where you can find one of the best-curated daily links lists on the financial web. No actual analysis or deep dives, just a list of great articles you can peruse yourself. Much of what’s pertinent to investors on banks, stocks, the economy, trading. And on Saturdays, Tadas adds hot takes from the whole week on health, nature, personal finance, food, cars, real estate and more.

Kara Swisher & Scott Galloway: the Pivot podast

Kara Swisher has been one of the most influential technology journalists in the country since the mid 1990s. She knows all the titans personally, has been interviewing them since their garage-startup days. She talks to the market movers: CEOs, politicians, investors, gurus. She never pulls a punch and she sets the record straight, no matter her audience. Her books detail her experiences watching these companies take over the world, from AOL to Facebook, Apple to Tesla. Her latest bestseller is Burn Book.

Scott Galloway is a professor at NYU's Stern School of Business, a serial entrepreneur and a student of market and brand data— and human psychology. He wrote a hugely enjoyable book called The Four, about some of today’s ‘Magnificent Seven,’ and is frequently invited to CNN and Fox Business to provide explanation and counsel. 

Their podcast together, Pivot, is a remarkable fusion (and abrasion!) of their keen minds and shared outrage at this moment where tech meets business and politics. This is an addictive listen.

Ben Carlson, Ritholtz Wealth Managment: A Wealth of Common Sense blog

With keen observation and an impressive wisdom, Ben provides grounding to the financial community with his buy-and-hold doctrine and get-rich-slow values. Ben’s blog offers intelligent analysis not of individual stocks but of the current environment, what drives him crazy about his industry and the traps we all fall into. His book, A Wealth of Common Sense, is one of the best investing guides I’ve read in years.

Josh Brown, Ritholtz Wealth Management: Downtown Josh Brown blog

Josh offers a smart and entertaining perspective on the money-management industry, the follies of markets and investors, what should be obvious patterns, as well as on markets and the economy. He weaves in pop culture references like Mick Jagger and The Ramones to make his points more accessible. One memorable post related a volatile bear-market environment to Leonardo DeCaprio's repeated survival trials in The Revenant. 

Matt Levine, Bloomberg Business: Money Stuff blog

Matt Levine is a former investment banker who’s graduated to become one of the best, loosest and most accessible finance columnists in the business. He makes the complicated and confusing seem understandable— even when it’s ridiculous. His editors give him wide berth to say what he wants for as long as he wants, and he has a lot to say. Impossibly well-read and informative, even funny. He’s a great read.

Jason Zweig: The Wall Street Journal: A Safe Haven for Investors blog

The Wall Street Journal has prided itself on being the go-to news and financial media source for well over a century, and Jason Zweig has been their personal finance columnist since 2008. He appears regularly on radio and TV and he’s written for Time and Money magazines. Jason is the author of The Devil’s Financial Dictionary, and he edited the revised edition of the great Benjamin Graham’s investing masterwork, The Intelligent Investor. No one knows this subject better. 

Then there are those who don’t write a column or a blog necessarily, but who have outsize impact in the capital markets. These investors have sufficient gravity to pull in board members, executives, journalists, and retail investors like us, who watch them for perspectives and useful ideas. Just by keeping your eyes peeled for news with their names you’ll gain all sorts of insight.

Warren Buffett, Berkshire Hathaway 

You already know who he is, because he’s the biggest of them all. Warren is in the financial news somewhere just about every day. No one on the planet has more market wisdom or stock-picking expertise, or more patience. He’ll be 94 this summer and still there is no one in the industry more wise, or more worthy of trust. His instincts and clarity are astonishing. Thousands of analysts, brokers, shareholders and everyday folks seek out his annual letters to shareholders in order to better understand the state of the financial world and learn what ‘Uncle Warren’ sees coming. 

Jamie Dimon, JPMorgan Chase bank

Jamie Dimon has been the Chairman and CEO of JPMorgan Chase bank for nearly 20 years. If we get a sensible presidential administration again in the next decade or so, he’s a shoo-in for Treasury Secretary. When the shit hits the fan in the financial universe, he is one of the first and most-quoted individuals. Queens NY born and bred, he is no-nonsense and clear-eyed. And smooth: many suspect his political affiliation but you’d never know from his public persona or statements— his reputation depends on even-handedness and an ability to work with anyone. 

Peter Lynch, Fidelity: One Up On Wall Street 

Peter Lynch is long retired, but he’s effectively the godfather of individual retail investing. He took over management of investing giant Fidelity’s Magellan Fund in 1977 and over the next 13 years achieved stunning returns of over 29% per year. He then wrote two bestsellers in the early 2000s to help yo-yo’s like you and me invest smarter: One Up On Wall Street and Beat the Street. Both are bibles in the investor community to this day. Those books are what got me started.

How Not To Invest - Barry Ritholtz

Barry Ritholtz is one of the most respected managers and most trusted financial advisors in the business. He's just released a book, How Not To Invest: the biggest and most common investing mistakes, and the dumbest, most wealth-destructive thinking. I haven't read it yet but if its anything like his long-running blog, The Big Picture, it will be full of rational ideas and written just as much for those of us who are not finance professionals. You can also catch some Barry on his Bloomberg podcast, Masters of Business. 

I'm republishing his blog post from today, an attempt to strip his book down to a small pile of simple concepts. As usual, he sees things clearly. 

I highlighted a couple of sentences I found particularly timely this month. Enjoy!

— Robin

https://ritholtz.com/2025/03/biggest-ideas-in-hntii/

It is March 18th! Publication day is finally here!

The challenge in writing “How NOT to Invest” was organizing a large number of ideas, many of which were only loosely connected, into something coherent, understandable, and, most importantly, readable.

It took a while of playing around with the concepts, but eventually, I hit on a structure that I found enormously useful: I organized our biggest impediments to investing success into three broad categories: “Bad Ideas,” “Bad Numbers,” and “Bad Behavior.”

That insight greatly simplified my task of making the book both fun to read and helpful for anyone interested in investing.

Here is a broad overview of each of the 10 main sections, which can help you quickly grasp the key ideas in the book.

Bad Ideas:

1. Poor Advice: Why is there so much bad advice? The short answer is that we give too much credit to gurus who self-confidently predict the future despite overwhelming evidence that they can’t. We believe successful people in one sphere can easily transfer their skills to another – most of the time, they can’t. This is as true for professionals as it is for amateurs; it’s also true in music, film, sports, television, and economic and market forecasting.

2. Media Madness: Do we really need 24/7 financial advice for our investments we won’t draw on for decades? Why are we constantly prodded to take action now! when the best course for our long-term financial health is to do nothing? What does the endless stream of news, social media, TikToks, Tweets, magazines, and television do to our ability to make good decisions? How can we re-engineer our media consumption to make it more useful to our needs?

3. Sophistry: The Study of Bad Ideas: Investing is really the study of human decision-making. It is about the art of using imperfect information to make probabilistic assessments about an inherently unknowable future. This practice requires humility and the admission of how little we know about today and essentially nothing about tomorrow. Investing is simple but hard, and therein lies our challenge.

Bad Numbers:

4. Economic Innumeracy: Some individuals experience math anxiety, but it only takes a bit of insight to navigate the many ways numbers can mislead us. It boils down to context. We are too often swayed by recent events. We overlook what is invisible yet significant. We struggle to grasp compounding – it’s not instinctive. We evolved in an arithmetic world, so we are unprepared for the exponential math of finance.

5. Market Mayhem: As investors, we often rely on rules of thumb that fail us. We don’t fully understand the importance of long-term societal trends. We view valuation as a snapshot in time instead of recognizing how it evolves over a cycle, driven primarily by changes in investor psychology. Markets possess a duality of rationality and emotion, which can be perplexing; however, once we understand this, volatility and drawdowns become easier to accept.

6. Stock Shocks: Academic research and data overwhelmingly reveal that stock selection and market timing do not work. The vast majority of market gains come from ~1% of all stocks. It’s extremely difficult to identify these stocks in advance and even harder to avoid the other 99% of stocks. Our best strategy is to invest in all of them through a broad index. Some terrible trades are illustrative of this truth.

Bad Behavior:

7. Avoidable Mistakes: Everyone makes investing mistakes, and the wealthy and ultra-wealthy make even bigger ones. We don’t understand the relationship between risk and reward; we fail to see the benefits of diversification. Our unforced errors haunt our returns.

8. Emotional Decision-Making: We make spontaneous decisions for reasons unrelated to our portfolios. We mix politics with investing. We behave emotionally. We focus on outliers while ignoring the mundane. We exist in a happy little bubble of self-delusion, which is only popped in times of panic.

9. Cognitive Deficits: You’re human – unfortunately, that hurts your portfolio. Our brains evolved to keep us alive on the savannah, not to make risk/reward decisions in the capital markets. We are not particularly good at metacognition—the self-evaluation of our own skills. We can be misled by individuals whose skills in one area do not transfer to another. We prefer narratives over data. When facts contradict our beliefs, we tend to ignore those facts and reinforce our ideology. Our brains simply weren’t designed for this.

Good Advice:

10. This is the best advice I can offer:

A. Avoid mistakes (fewer unforced errors, be less stupid).

B. Recognize your advantages (and take advantage of them).

C. Create a financial plan (then stick to it). If you need help, find someone who is a fiduciary to work with.

D. Index (mostly). Own a broad set of low-cost equity indices for the best long-term results.

E Own bonds for income and to offset stock volatility. Primarily

Treasuries, investment-grade corporates, munis, and TIPs.

F. Be tax-aware. Consider direct indexing to reduce capital gains and

reduce concentrated positions.

G. Use a regret minimization strategy when sitting on outsized single position gains.

H. Be skeptical of all but the best alts (VC/PE/HF/PC). If you have access to the top decile, take advantage of it. Otherwise, exercise caution.

I. Spend your money intelligently: Buy time, experiences, and joy. Ignore the scolds.

J. Fail better. Understand what is and is NOT in your control.

K. Get rich: Here are the classic strategies to get rich in the markets, including how difficult each is and their likelihood of success.

~~~

I was just discussing the idea with Morgan Housel and Craig Pierce —  “Is this anything?” and now it is the day it arrives! (Hardcover and ebook are published today; Audible audio version is out tomorrow).

How did that happen so quickly…?

You can order it in your favorite formats in the US, UK, or around the world. If you want to learn more before putting down your hard-earned cash, check this wide array of discussions, podcasts, reviews, and mentions.

This book was a joy to put together, and I have been delighted at the response it has received! Please let me know what you think of it at HNTI at Ritholtz Wealth.