Why a 15 P/E Ratio Represents Fair Value for Most (not all) Companies: FedEx Part 2

One of my favorite Warren Buffett quotes is “investing is most intelligent when it is most businesslike.” The reason this quote resonates so much with me is because I believe it represents the essence of value investing. To me, value investing is about positioning yourself as a shareholder/owner/partner in a wonderful business that you admire and want to partner with long-term. In the past, I referred to this as business perspective investing. This is in stark contrast to trading stocks or playing the market.

Consequently, business perspective value investors are most concerned with the results the business is generating on their behalf. By this I mean the revenues (sales), profits (earnings), cash flows, and if any dividend production and growth, etc. In other words, the fundamentals and fundamental value of the business. Therefore, the business perspective value investor’s most important question is – how’s business? This is in stark contrast to the market player whose most important question is – how is the stock price behaving? In short, the business perspective value investor expects to be rewarded by their businesses operating performance instead of the less reliable and often fickle stock market behavior.

Nevertheless, even though most of us are small players investing in mammoth publicly traded companies, the principles of business ownership still apply. Personally, I believe the realization of the insignificant level of ownership that most individual investors have is what causes them to forget about the principles of business perspective investing and focus more on market action. Many investors find it a huge leap to think of themselves as owners or partners of Apple, Google, Johnson & Johnson, Home Depot, Walmart, 3M – or any other large publicly traded company. Yet, in truth and fact, if you buy stock in any of those companies you, as a shareholder, are also a partner and an owner. So, my advice is you should think like one.

The P/E Ratio Is Simply a Thermostat

Business perspective value investors utilize and think about valuation references such as the P/E ratio differently than stock market investors. Consequently, I want to be crystal clear that my following discussion of the P/E ratio is referencing utilizing the metric to ascertain a company’s intrinsic value/business value. This is in stark contrast to those who are thinking of P/E ratios as they relate to how the market may be treating a given company.