Looking around at common stocks using the old p/e ratio as the valuation metric, things look pretty scary. Most of the growth of large-cap companies has been fueled by an increase in p/e ratios. I have been watching CAT (Caterpillar), the stock for which has doubled in the last twelve months or so. The p/e ratio has more than doubled. This represents the anticipation of growth, not necessarily the actual growth that is taking place.
Much of this is driven by the never-ending thirst for AI and AI-related stocks. It’s hard not to get sucked in to the search for gold and lose sight of my investment objectives, which I have never articulated.
It is very worrisome. I had some great stocks that I disposed of, which had high p/e ratios that were rewarded with even higher p/e ratios. But another problem that comes up for consideration is portfolio rebalancing. If you bought Google after the IPO, you would have had an overconcentration problem in fairly short order. Rebalancing would have taken away the enormous profits that would have been made by hanging on to the stock.
I have no answer to this risk mitigation strategy. But eliminating risk would have eliminated making huge profits since that time. I don’t know. Heads you lose, tails I win. If you figure out the answer, please let me know. But being retired makes the risk-taking even more complicated.
