Google…When expensive is Cheap and Cheap is Expensive…and How I Hunt

Google has been public for 10 years. They have NOT been a conventional company.

My partner in Social Leverage 50 @ivanhoff has a great post up on Google entitled ‘When Expensive is Cheap and Cheap is Expensive‘:

10 years ago, Google was trading near $100 with a P/E of 130. Today, it is trading near $600 with a P/E of around 30. What is the lesson?

At the time of Google’s IPO, investors didn’t know about gmail, Youtube, Android and countless other cloud services, innovations and venture investments that Google was going to make. Most likely, Google’s management also had no idea that it will purchase and develop those services.

Some might make the valid argument that there’s no lesson at all. You cannot make statistically significant conclusions based on one case of a company that is everything but ordinary. If anything, there is evidence that buying a basket of the most expensive stocks in the market is a poor long-term investment.

And yet, if you study the history of most of the best performing stocks, you will realize that that had three things in common:

1) they spend a lot of time on the 52-week high list.
2) they were considered to be expensive at the beginning stages of their price ascent.
3) They managed to outgrow their high P/E ratios

Having a high P/E is not a guarantee of future success. On the contrary. It is a huge hurdle, because it signifies big expectations that need to be met. Market is forward-looking, but it is not naive. It might have big expectations for certain fast growing, innovative companies, but it also expects those companies to deliver at some point of time.

If you filter out all stocks with high P/E, you would have missed on almost every single winner in the stock market. Truth is that you would have missed on almost every single major loser too, but there is a very simple way to filter out the potential losers – price.

This is how I have hunted/fished in the stock markets the last 14 years. I have culled it all down to 3 year, 5 year and all time highs along with the ‘Social Leverage 50’ product with Ivanhoff. A lot of smart investors I follow have this saying – ‘Only Price Pays’. I like it, but still believe it is money management that pays. I do love Fred Wilson’s iteration on the topic of price and investing – If price is the only reason you are NOT investing, you should invest. Fred is talking about early stage investing and again, money management is still key. In this case, if you are going to invest in early stage investments, it makes sense to spread the risk around over 40-50 investments at least.