There are two types of value investors. Those in the Benjamin Graham camp (value) and those in the Warren Buffett camp (compounders). Both look to buy business for far less than they’re worth. However, that doesn’t mean they both look for the same types of businesses.
Have you ever bought a stock with a sky high price-to-earnings (P/E) ratio? I won’t lie, I’ve done it before.
I got caught up in the excitement of growth and thought I and every other shareholder were going to rocket up with this one stock. But of course, it didn’t turn out that way. I was lucky enough to get out with a small lose.
I realised I had bought the anticipation of growth. While the numbers checked out, there was no certainty of protecting my downside. I’ve learnt to do better since. And my experience got me thinking about something Benjamin Graham wrote in his 1934 book, ‘Security Analysis‘.
Don’t buy stocks with P/E’s above 16.