Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2013

by Carol J. Loomis

Would you look for a higher price-to-earnings ratio at this point than you did in 1969? BUFFETT: That ratio would be affected by interest rates. The difference between now and 1969 or any other time, in terms of calculating a valuation, wouldn’t be affected by anything else. Now, if you looked at the overall market, returns on equity are much higher than they were in 1969 or 1974, or any other time in history. So if you’re going to say you’re going to value the overall market, the question becomes: “Do you crank in the present 20% returns on equity for American business in aggregate, and say that’s a realistic figure to stick on for this future that runs out until eternity?” I’d say that’s a fairly reckless assumption and doesn’t leave much margin of safety. And I would say that present market levels discount a lot of that, and so that makes me quite cautious.