Tony Abbate submits:
March 24th marked the 10-year anniversary of the peaking of ‘The Great Stock Bubble”. While technology was the biggest factor in creating the biggest bubble in U. S. stock market history, there were a number of other large cap stocks that sold at valuations way above their intrinsic value. Non-technology companies such as Wal-Mart (WMT), Home Depot (HD), General Electric (GE), Pfizer (PFE) and Coca-Cola (KO) all sold at Price/Earnings valuations above 40 on March 24, 2000. I remember so many people near the top of the market saying, ‘I am a buy and hold investor’. Unfortunately a lot of these people learned a painful lesson that buy and hold does not always work.
As a value investor, I believe the most important factor in selecting stocks is valuation. As a rule of thumb, I do not believe any company is worth more than 25 times earnings. Being a follower of Benjamin Graham and Warren Buffett, I think you should be disciplined and only buy stocks at a discount to their intrinsic value. In the large cap universe of stocks, I do not think you should pay more than 17.5 times earnings. Assuming no company is worth more than 25 times earnings, this provides a margin of safety of 30%.