4 ms·

Genuine question to all concerned about PE ratios. Why is PE not subject to 'new normals'? A lot of people seem to reject stocks because they're 'expensive' w

Genuine question to all concerned about PE ratios. Why is PE not subject to 'new normals'? A lot of people seem to reject stocks because they're 'expensive' which to me seems like a relative term. There are a lot more retail investors out there now.

JumpinJack_Cash 3y ago
Because if all that is left of the stock market is offloading your hand to a bigger fool then it's way more fun to fly to Vegas and do it at the poker table. At least you have to actually look in the eyes the guy you are screwing over. You can't buy stuff because you think other people will also buy, that would mean that you are buying/selling opinions not companies.
barumrho 3y ago
It is helpful to think of it in terms of unit economics. If a company sells a product, it needs to eventually make profit on each unit. (cost < price per unit) When it comes to owning a share, it eventually needs to make the investor money through dividends or price appreciation. The argument for high PE ratio is price appreciation (growth), but exponential growth is very hard to sustain, so PE ratio has to come down to a certain level in the long term. Also, there is always a risk of a company declining or even folding.
bagacrap 3y ago
There are lots of factors that can influence PE but if your long term investing thesis is that retail traders will always love NVDA the most (and won't move on to the next hype train, as they did with TSLA and many others) that seems... unlikely? If you can predict the next hype cycle or when exactly this one will end, you will make a zillion dollars. If you are talking about entire markets rather than individual companies then p/e matters because the only examples we have of markets with extreme p/e ratios all ended in disaster. You should still buy stocks for the long term regardless of PE ratios because you're right, it's not possible to predict what they'll do. Unfortunately when you buy at a high pe you can't anticipate as much return in the future, all else equal.

JumpinJack_Cash 3y ago

Because if all that is left of the stock market is offloading your hand to a bigger fool then it's way more fun to fly to Vegas and do it at the poker table. At least you have to actually look in the eyes the guy you are screwing over. You can't buy stuff because you think other people will also buy, that would mean that you are buying/selling opinions not companies.

barumrho 3y ago

It is helpful to think of it in terms of unit economics. If a company sells a product, it needs to eventually make profit on each unit. (cost < price per unit) When it comes to owning a share, it eventually needs to make the investor money through dividends or price appreciation. The argument for high PE ratio is price appreciation (growth), but exponential growth is very hard to sustain, so PE ratio has to come down to a certain level in the long term. Also, there is always a risk of a company declining or even folding.

bagacrap 3y ago

There are lots of factors that can influence PE but if your long term investing thesis is that retail traders will always love NVDA the most (and won't move on to the next hype train, as they did with TSLA and many others) that seems... unlikely? If you can predict the next hype cycle or when exactly this one will end, you will make a zillion dollars. If you are talking about entire markets rather than individual companies then p/e matters because the only examples we have of markets with extreme p/e ratios all ended in disaster. You should still buy stocks for the long term regardless of PE ratios because you're right, it's not possible to predict what they'll do. Unfortunately when you buy at a high pe you can't anticipate as much return in the future, all else equal.