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