I’m trying to learn a bit more about values of companies and other factors that impact the market.
Does anyone have experience of using: VIX, V-VIX, P/E Ratio, PEG Ratio - or indeed any other factors that you might use when choosing investments?
Yes, unfortunately, all of these factors are constantly used and compared against all other stocks and across all of history by hundreds of algorithms every minute.
Usually, the higher the P/E ratio, the better the investment, as insiders and people who know what’s happening within the company—and what the sales look like—are willing to pay a premium. This premium is often still below the company’s real intrinsic value, meaning the stock is actually cheap in reality.
However, if you believe in the company long-term, buying when the P/E is low can be a good investment. At that point, the market has likely stopped believing in the company’s growth, and so it becomes undervalued.
Warren Buffett is known not only for avoiding investing based on P/E ratios but for deliberately ignoring them. He focuses instead on the business itself and the people who run it. Understanding the customers, management, business model, pricing power, and the fundamental nature of the business is far more important—these are the kinds of factors that are difficult to automate.
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Thanks for sharing your thoughts on this topic.
Just one point on this, did you mean to say “Usually, the LOWER the P/E ratio, the better the investment”, instead of “HIGHER”.. or have i misunderstood? Thanks
Yes, a lower PE is better.
A high PE ratio means that investors are paying more for each unit of Earnings, so the stock is more expensive compared to one with a lower PE ratio.
An important factor is the quality of the stock. If the company is high quality then the valuation (and price) will rise leaving the PE ratio relatively the same (i.e. low). Obviously if other investors find the company to be high quality then demand for the share will rise and so the PE ratio will rise.
The PE ratio is one of the many ratios that investors should consider.
You are wrong, the higher PE ratio, the more investors pay for each unit if earnings that occured last year. It tells you nothing about how much you pay for each unit of earnings that happens now or next year.
That is why higher PE ratio is usually better, people that knows what the earnings will be will make the price and the PE ratio go up when the earnings are expected to grow fast and company is doing good while PStavely sells the stock as PE is too high and misses on all the great profits that the company has.
When insiders and professionals know the company will be doing bad, the PE goes lower and PStavely and all retail looking at the PE ratio buys before the company starts to decline and goes into trouble.
Buying on low PE makes sense only if you know something the professionals don’t.
No, usually higher PE is better - MSFT, google, Amazon, Netflix all have high PE
If you look at low PE you will find bad companies like Delta airlines, At&T, GM, Ford etc. Companies that are not even beating inflation
For example if you have invested in NVDA at 120 PE, you would have 5x your money as even at 120PE it was cheap in comparison to the earnings that were about to come
The P/E ratio offers a quick snapshot of how much investors are willing to pay for each unit of a company’s earnings. However, it must be interpreted carefully and in context. When the P/E is high, caution is required.
Indeed, a very high P/E ratio (for example, above 30) typically suggests that investors are pricing in strong growth expectations. However, such elevated valuations can also indicate excessive optimism, where the stock price has outpaced the company’s fundamental earnings potential. In these situations, even minor earnings disappointments can trigger significant price corrections. Paying a premium for future growth only makes sense if that growth is both credible and sustainable (it will not continue indefinitely).
On the other hand, a low P/E ratio (below 15, for example) could signal either opportunity or warning. It may indicate that a company is undervalued by the market, potentially offering an attractive entry point, particularly if the business has solid fundamentals and stable earnings. However, a low P/E might also reflect underlying structural problems (such as declining revenues, operational inefficiencies, or a negative sector outlook).
For these reasons, contextual analysis is essential, and the P/E ratio should never be evaluated in isolation. Its significance depends on multiple factors, including:
- The company’s historical earnings performance
- Balance sheet strength and debt levels
- Expected future earnings growth
- Peer comparisons within the same industry or sector
- Broader macroeconomic conditions (for example, inflation or interest rates)
For instance, a low P/E in a capital-intensive, cyclical industry may not be concerning if current earnings are temporarily depressed but likely to recover. Likewise, a high P/E in a fast-growing technology firm might be justified (if the growth is both real and durable).
Ultimately, a high P/E can signal risk just as much as it can reflect opportunity, and a low P/E can be either a bargain or a red flag. To make informed investment decisions, investors must combine valuation ratios with rigorous fundamental analysis and a clear understanding of market dynamics.
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If you bought it at 15-20 PE you’d have 10x’d your investment and bought it somewhat derisked
Las time NVDA PE dropped from above 20 to below 20 was in 2014 and NVDA was stagnating for next 3 years so… You are wrong
I mean… That’s simply not what reality says though.
Edit: in short, low P/E ratio tend to have abnormal positive returns over a short period (1-3 years), and returns correlates negatively with P/E.
The discrepancy disappeared for longer term holding, where P/E holds no predictive power over stock returns.
High P/E are a good predictor of high growth rate of earnings, with no positive impact on returns for the investors.
I’ll try to answer the initial question at hand.
This is only my own take on the topic, but I do have 2.5 years of experience as a buy-side analyst in a hedge fund.
- P/E ratio in itself is meaningless. There is no consensus or absolute scale to determine what constitute a high or a low P/E. It is more worthwhile to look at P/E segregated by industries, and compare a company’s P/E against their industry peers. A higher P/E than normal means the company trades for a premium; the question which arises is then, is this abnormality due to market speculation, or does this company have something unique that justifies its higher price?
- From my work, we prefere to look at a close cousin instead, the EV/EBITDA, as comparing companies with different leverage ratios on a P/E basis gives a much less reliable picture. Accounting for leverage in our analysis comes later in the process.
- More importantly, we tend to not compare valuation multiple against peers, but rather against the company’s own historical multiple. As it turns out, when business operations do not have massive changes, their EV/EBITDA tends to be fairly stable over time - high deviations from historical levels prompts us to investigate. We like buying stocks when they trade cheaply, relative to their own pricing history (so a low multiple), if we can ensure that the low valuation is not a result of their business operations being negatively impacted in some way.
- None of this work gives us a signal to buy or sell, only a signal to investigate further.
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This research paper is correct, between 1950 and 1990 it was the case, where lower pe predicted higher returns.
However since 2000 this has completely flipped as the prediction tools got so good it is not the case anymore.
I have backtest of PE as predictor for returns and Higher PE correlates with higher returns for the following year for stocks in SP500.
This relationship is dominant since year 2000 and especially in last 10 years.
Do not take this as a personal attack, I do not say that I don’t believe you, or do not mean to disrespect your own experience in any way, but allow me to express my doubt.
In a world where every markets has moved towards a quantitative optimisation, where every one with a computer is farming for factors right and left to generate alpha fees on type I errors, and where the P/E is the first factor always included which sees its premium vanishing to any other factor included, I would be genuinely interested to have a look at your backtesting results.
More directly - I am having doubts about your claims, would you be so kind as to share some of your results and methodology?
Some great discussion here everyone - just what i wanted from this thread! (and thanks for all the inputs)
Does anyone put any credence in VIX or V-VIX to determine when is a good time to invest?
Yes markets are very optimised, I will give first my thoughts on this and then my methodology.
Investing on a low PE as safe and great strategy has been taught everywhere like forever.
Market participants that move the price nowadays have the real time information about credit cards and customer spending, insiders are trading based on insider information and projections.
When the Apple’s earnings are released in May about the earnings that happend in January to March, the insiders and credit card information is already getting informations about April and May.
While Apple PE informs you about earnings from April 2024 to March 2025
I did this backtests using portfolio123 tool. Investing into 50 highest PE stocks out of SP500 for each year beats the SP500 index by 2% annually, investing into 50 lowest PE stocks each year underperforms the SP500 by 4% per year
Now I thought, this is because of the magnificent 7, so I excluded them. The results shifted by gains, but the correlation and difference between top 50 and bottom 50 stayed the same.
Last think for this topics is a question…
When was the PE of sp500 highest in its history? …
No it was not 1930, not 2000, not 2021
It was first year of the financial crisis crash, when stocks were 40% down from all time high and PE of sp500 was above 100