68 The Business of Value InvestingP/E ratio of 42 means you are paying $ 42 for each dollar of earn-
ings. The earnings yield is the return you get based on the price
you pay. For $ 42 you are getting $ 1, implying a yield of 2.4 percent
( $ 1/ $ 42). When Google was trading at these valuations, ultra - safe
U.S. Treasury bills yielded over 3 percent. In other words, investors
were willing to take less return by paying more in hope of a con-
tinual rise the in share price. You have no margin of safety at such
lofty valuations. The slightest hiccups and the share price begins to
free fall.
Stocks are merely pieces of paper that fl uctuate in price every
Monday through Friday. Great investments, however, arise when
sound business fundamentals dictate the investment decision.
That ’ s why it ’ s imperative to have a sound grasp of what it is you
are doing — buying businesses — and what that entails. As I alluded
to in Chapter 4 , you must approach the markets with an emotion -
free, fundamentally based approach before beginning your search
strategy. Searching the stock market without a sound investment
philosophy is like trying to walk before learning to crawl: It ’ s a pain-
ful experience.
There is only one Warren Buffett, and he devoted the time,
passion, and intensity needed to go through the 10,000 - page
Moody ’ s Stock Manual page by page, looking at every single stock, in
order to develop a mental model of the markets. If you are a seri-
ous investor looking to participate in the investing game for many
years, be prepared to roll up your sleeves and look at hundreds of
stocks continuously. Fortunately, investors today have many more
resources that aid in the search process than were available dur-
ing Buffett ’ s early years. Unfortunately, investors today have many
more resources that also can lead to poor investment decisions.
What I mean by this is that while it ’ s great to have more resources,
too much information or data begins to add noise to the mean-
ingful information that you really need. In order to have a good
search strategy, it ’ s important to fl ip the concept around fi rst.CH005.indd 68CH005.indd 68 9/2/09 11:08:03 AM9/2/09 11:08:03 AM