When Price/Earnings ratios rise, it is the product of two factors, and Warren Buffett detailed them both.
“It’s very simple, the price-earnings ratio, relative price-earnings ratios, move up because people expect either the industry or the company’s prospects to be better relative to all other securities than they have been, than their proceeding view. And that can turn out to be justified or otherwise,” Warren Buffett said at the 1998 Berkshire Hathaway Annual Meeting. “Absolute price-earnings ratios move up in respect to the earning power, or the prospective earning power of, that is viewed by the investing public of future returns on equity, and also in response to changes in interest rates.”
Buffett’s full explanation on P/E ratios
© 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.