The world of TradFi investing can be quite tricky. I created this territory as a place to build my own knowledge, share it, discuss amongst bitcoiners with the goal of refining my thinking.

The price to earnings ratio (P/E) always sort of confused me.The price to earnings ratio (P/E) always sort of confused me.

A low P/E could mean you are buying a good company at a great price or it could mean this business is failing thus may be obsolete in a few years.

On the flip side a high P/E could mean you are overpaying for a company. Meaning you aren’t getting much future value if you purchase the stock because to many investors have already purchased ownership in the company thus driving up the price.

But if the company is still growing (thus increasing it’s earnings at a faster rate than what it’s price does) then you may be getting in early. This is why many value investors missed the Amazon stock rise because the P/E valuation didn’t make sense in the 2000s and 2010s. But had history shows Amazon had tremendous room for growth.

So as a bitcoiner how am I supposed to evaluate P/E?So as a bitcoiner how am I supposed to evaluate P/E?

As we know bitcoin doesn’t have any earnings. So how does one go and find a good investment into a company using this one (of many) metrics of a company?

Bitcoin value investor extraordinaire Preston Pysh really helped me understand P/E ratio from a practical sense.

The Amazon ExampleThe Amazon Example

Let’s take the P/E ratio of Amazon today which is 44. So what does 44 mean?

The way Pysh explains if I buy one share of Amazon today at the price of $184.42 that means I am paying 44 times the amount of earnings the company brings in.

To make it even simpler imagine Amazon only made $1 in a year. To become part owner of Amazon and to gain access of that $1 of earnings I need to pay $44 dollars on the open market to own 1 share of Amazon.

Then one might ask why in the hell would I pay $44 to gain access of $1 of earnings?

Well if Amazon continues to grow and the $1 of earnings in a year turns into $5 in a year (and price remains fixed) dropping the P/E ratio to 8.8. Now the next person who wants to own a share of Amazon will only pay $8.80 a share for every $1 earned by Amazon which by historical standards (a P/E of 15 is the benchmark for what is cheap versus expensive) is very cheap thus being a good value stock. But odds are investors will see Amazon is still growing becoming a profit king thus the P/E will remain elevated as buyers will continue to outpace Amazon business performance.

Pysh now thinks to himself will Amazon grow fast enough to out perform something that is limited in supply and has a compounded annual growth rate of at least 50%. As a value investor he says no and he buys bitcoin instead.

A speculator might think Amazon will take over the world and on their way to becoming a $5T company plus hopeful they will pay dividends at some point thus paying $44 dollars to access $1 of earnings to them makes all sense.

ConclusionConclusion

When you see a P/E ratio on yahoo finance or your favorite brokerage app you can simply take that number you see and divided it by $1.

Then you can ask yourself do I really want to pay the P/E ratio amount to have ownership of this company earning one dollar?

Then you can look at the share price and see if the company is worth owning (assuming you know more about the company than just its share price!!)

P/Es of some well known companies and ones that hold bitcoinP/Es of some well known companies and ones that hold bitcoin

Verizon (VZ) = 16.93 or $16.93 per $1 of earnings. Priced at $45.09 per share today

MicroStrategy(MSTR) = negative (don’t have any earnings) Priced at $163.77 per share today

Tesla (TSLA) = 68.52 or $68.52 per $1 of earnings. Priced at $244.83 per share today

Caterpillar (CAT) = 17.97 or $17.97 per $1 of earnings. Priced at $391.98 per share today

Invest wisely. Or just buy bitcoin. It’s your choice!