Tuesday, June 28, 2005

Are we going to make the same mistake again?

Come on, people. It’s not like the bursting of the stock market’s tech bubble is all that long ago. Are our memories so short?

I was just reading about shares of Google reaching 300. Before jumping to any conclusions about “irrational exuberance” rearing its ugly head yet again, I did a little research. Sure enough, the price/earnings ratio is in triple digits.

Let’s remember, the idea of investing in a business is for that business to generate enough earnings to make your investment worthwhile. A P/E in triple digits means it’s not even earning a penny for every dollar you invested. So how long do you think the stock market will support such a lopsided price? Eventually, someone’s going to stop and ask why anyone would pay so much for a company, no matter how good its future growth prospects are.

It’s frustrating enough to me when people fail to learn from the lessons of history. When those lessons are so fresh that everyone’s retirement accounts are still recovering from them, I have to wonder if people really are, as a group, just a mass of greedy, mindless cattle, happily staying with the herd until it’s too late and they realize they’ve walked right into a slaughterhouse.

If you own shares of Google, don’t be an idiot--sell them! Could they go higher? Sure they could, but you should thank your lucky stars that it’s as high as it is right now and not be a pig about it. If you got burned the first time around, well, so did lots of people. This time, especially with a “dot com” stock, I think you’ve been warned.

Really, people! A P/E in triple digits? Snap out of it!

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