Monday, January 14, 2013



"Everything should be made as simple as possible, but not simpler." Albert Einstein

(Image courtesy of Wikipedia)


Simple models of stocks generally lead to wrong conclusions. P/E and PEG models are simple models that often misinform.


For instance, a cyclical stock has a low P/E just when it is most dangerously valued.

A stock with a declining business has a low P/E because investors expect nothing, not because it is a good buy.

PEGs tell you nothing about the quality of growth or the following year's growth.


You can -- and should -- simplify; but you cannot simplify so much that your Mona Lisa begins to look like a Betty Boop.

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