Dear Reader,
Good morning,
Today I want to talk about Buffett’s/Berkshire Hathaway’s $5 billion investment in Alphabet stock (SYM: GOOG).
We know Warren Buffett is retiring at the end of this year, which is bittersweet.
He’s been the greatest mentor of my life that I never met.
I’ve learned so much from him.
News came out Friday that Berkshire Hathaway acquired over $4 billion worth of Alphabet (SYM: GOOG) shares in Q3, right around the same time and price that we recommended it to our readers.
The reason we recommended it at that time was because the Justice Department didn’t force Google to break up.
Had the company been forced to break up, history shows that typically the resulting companies made up of the components drive the stock much higher. A lot of value gets unlocked when this happens.
But I think the judge wisely saw that Google has a lot of competition coming with AI, and that they don’t have a “forever monopoly.”
It’s not a utility - today in Google we have a company in an incredibly competitive space…
OpenAI has just launched their Atlas browser to compete with Google’s Chrome. I mean, they’re getting attacked from all sides.
The reason we recommended it was simply because the darn thing was trading at 16-times earnings.
When I see a dominant supercompetitor trading at 16-times earnings with a return on capital of 30% a year…
Here’s the math on that:
Typically a company’s return on equity will approximate their P/E ratio over time.
So, if you see a company earning a 30% return on equity, typically you expect to see it trade around 30-times earnings.
If the P/E is lower than the return on equity, that often indicates a great buying opportunity.
We used the same rule (among other things) when we recommended Microsoft, Nike, Boeing.
It’s one of the key things I learned from studying Buffett’s “playbook.”
He didn’t come out and state it, but it’s one of the great lessons inferred from reading all his stuff (and many other things I’ve studied in this game).
I hope this helps you, too, in your investing.
I also have to remind you here that today is the last day to invest in our “#1 AI stock to buy asap”...
That’s because we believe NVIDIA will make an announcement tomorrow that will skyrocket a little-known stock that is the literal brains behind NVIDIA’s two most-powerful chips.
We’re pulling this video offline first thing, so check it out before it’s gone for good.
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