Warren Buffett has historically aimed for P/E ratios in the range of 11 to 15 times earnings when making investments. This valuation approach is a cornerstone of his renowned value investing philosophy.
Buffett's preference for P/E multiples within this specific range translates into a corresponding earnings yield. An earnings yield is simply the inverse of the P/E ratio, providing insight into the earnings generated per dollar invested. For a P/E ratio of 11-15, the equivalent earnings yield is roughly 7% to 9%.
Understanding P/E Ratios and Earnings Yields in Buffett's Strategy
The Price-to-Earnings (P/E) ratio is a widely used valuation metric that measures a company's current share price relative to its per-share earnings. It helps investors determine the market value of a stock compared to its earnings. A lower P/E ratio can often indicate that a stock is undervalued or that investors expect lower future growth, while a higher P/E ratio might suggest high growth expectations or that a stock is overvalued.
| Valuation Metric | Typical Range for Buffett | Interpretation |
|---|---|---|
| P/E Ratio | 11 to 15 times | Price paid relative to earnings. |
| Earnings Yield | 7% to 9% | Earnings generated per dollar invested (inverse of P/E). |
Buffett's consistent pursuit of companies at these P/E levels means he generally looks for businesses that are valued below the broader market average. This disciplined approach underscores his focus on acquiring quality businesses at a reasonable, if not attractive, price, rather than chasing high-growth companies at premium valuations. It reflects a fundamental belief in buying a "dollar for fifty cents," where the intrinsic value of the business is perceived to be significantly higher than its market price.
For a deeper understanding of the Price-to-Earnings (P/E) ratio, you can refer to resources that explain what a P/E ratio is.
