Becky from CNBC had a talk with Warren Buffett and how Buffett is a bit pessimistic. Becky’s interpretation is an excellent example of how media changes focus and does not interpret properly. Specifically Becky keeps talking about the following comment:

I made by far the best buys I’ve ever made in my lifetime in 1974.

She keeps saying that even though now is doom and gloom there are buying opportunities like Buffett said. Becky misinterpreted Buffett. What he said is that in times like this you could make good buys, and that in 1974 he did. To understand the complete nature of that comment you need to look at the context. Let’s look at the time period from 1970 to now on the DOW and S&P.


Warren, my boy, you picked at the best moment that you could have in the last 40 years. But that is not too unbelievable because after all this is Warren we are talking about. Let’s look at 2007, and what do we see? There is no dip and there is no buying opportunity. Rather what I see is that just before peak that formed between 1970, and 1975, which would imply that now is not a buying moment and stocks are not cheap.  (Note: I find this comment funny because I wrote this blog entry yesterday before a bunch of CNBC commentators said it today, which happens to be a down day.)

The problem that the market has, and people like Becky who don’t completely consider the context  is that has had a speculation inflation. In a 1992 stock investing book that focusing on growth stocks said the following (Note I am not that old, just a book collector)

A P/E ratio that is very attractive in relation to the growth rate with target of a prospective PEG of not more than 0.75 and preferably under 0.66. Put another way, the prospective multiple (PE) should be not more than three-quarters of the estimated future growth rate and should be preferably under two-thirds.

What does Cramer and company say on this issue?

In Jim Cramer’s Book Mad Money Watch TV, Get Rich, page 34. Stocks that trade at two times growth or more are too expensive. With a forecast earnings of 46%, my understanding is that WFR could trade at 92 times earnings before being considered expensive. As I review the PE Ranges over the last five years I see the maximum PE that WFR traded at was 72 on 5/9/03. But of course this came from BigCharts and I don’t think this is based on diluted EPS. But that could mean, given an EPS of $2.59 and a PE of 72 we could see $186.46 at the end of the 4th quarter earnings report, in a perfect world. I wouldn’t be so optimistic. At best I would not be surprised by a high PE of 38 and a high price of $98.42. I might add that the current PE Ratio could go up on an analyst upgrade. From what I see right now there is room for upgrades. But at the same time given a possible slowing economy we could see multiple contractions too. But I think we could say also that a PEG of 1 would equal a PE multiple of 46 and that would mean $119.00 per share.

See the amount of valuation inflation that we have had in the past 15 years? I am not against paying more for a stock if the company is worth it. I am against paying more if it is a speculation inflation. People keep inflating the acceptable PE, and PEG, which has absolutely nothing to do with the performance of a company. This inflation is a speculation inflation and has to go back to normality. Some of you might say, "oh oh it’s a new economy." Yeah whatever, that’s what they said in 2000, and that is what they said in 2006 housing.

What has to make you think, and this is why I believe that we are entering stagflation, or range bound market is that speculation inflation has to be squeezed out.