People spend a lot of time looking at P/E ratios (Share Price divided by Earnings) when deciding whether to buy a stock. However, Warren Buffett notes that “It isn’t a multiple of today’s earnings that is primarily determinate of things.”
“It’s the future that counts,” Warren Buffett said at the 1995 Berkshire Hathaway Annual Meeting, using an all-time hockey great’s words to illustrate his point. “Wayne Gretzky says to go where the puck is going to be, not where it is… We want to be in the business that 10 years from now is earning a whole lot more money than it is now, and that we will still feel good about the prospects of the business at that time. That’s the kind of business we’re trying to buy all of, and that’s the kind of business that we try and buy part of.”
Buffett’s full explanation on future earnings
© 2021 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.