This is the fourth and the final instalment of Philip Fisher’s “Four Dimensions of Investing” series. The first three were discussed as part of Value Investing Almanack’s special reports (previous three issues). It’s recommended that you read the first three parts before reading this one.
The first three dimensions of conservative investment were essentially about the quality of the business itself. However, a great business becomes a great investment only when it’s acquired at a reasonable price. That means, without considering the price, the conservativeness of an investment process is still questionable. So, price is the fourth dimension of conservative investing.
Now, price alone doesn’t reveal much information. One needs to compare the price to something else to be able to make any sense out of it. That brings us to the price-earnings ratio (P/E).
A stock trading at P/E of 15 means that Mr. Market is willing to pay Rs. 15 for every rupee of earning the business generates. So, a corollary to this statement would be – P/E is roughly the number of years an investor will need to hold the stock to recover his or her original investment in the business. In the above example, it would take 15 years to recoup the initial investment.
P/E multiple is the most popular metric tracked by the investment community and perhaps the most misunderstood one too. The purpose of P/E isn’t just to capture two independent data points – price and earnings – into a single one. Price-earnings ratio is the barometer of Mr. Market’s expectations. In other words, P/E
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