Sunday, 26 February 2012
WHAT WARREN BUFFETT THINKS ABOUT P/E RATIOS
The P/E Ratio is often used to calculate the value of a share but is a subjective test. Some people could consider a P/E ratio of 18, for example, too high; others would think it was just right.
Warren Buffett has not had a lot to say about P/E Ratios as a method of valuation and it is probably only one factor that he takes into account.
However, most of the key stock purchases of Warren Buffett identified by Mary Buffett and David Clarke had a fairly low P/E Ratio at the time of purchase. This seems common sense if only for the ‘margin of safety’ factor.
A stock with a P/E of 30 obviously has much greater scope for a fall than one with a P/E of 9.