This Investing Giant Says P/E Ratios Are The Wrong Measure

Investing great Chuck Akre has been known to buy companies with what The Wall Street Journal called "scarily high” P/E ratios. How does this well-known "value" investor justify that?

A price-to-earnings (PE) ratio is the company's current share price divided by its earnings per share. If the share price is high compared to earnings, it could be a sign you're overpaying. If the share price is low, it indicates you might be getting a bargain.

But Akre looks at another measure:

We try to find out the free cash-flow per share the company is generating, and we value businesses based on that rather than P/E numbers. If you paid 20 times for a business that was compounding the economic value per share in the mid-teens and have some level of confidence it is likely to do that for a reasonably long level of time, you will get to heaven doing that.
— Chuck Akre

If that all sounds too complicated to you, then Akre is another investment guru who recommends index funds. Investing is hard, he agrees, and using index funds is, he says, “a perfectly reasonable way to get the market experience.”

If you want more on Akre, check out William Green's enjoyable and surprisingly profound book, Richer, Wiser, Happier: How the World's Greatest Investors Win in Markets and Life. Akre is one of the investors profiled.

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