Buffett's Secret Metric: Why He Ignores P/E Ratios
Warren Buffett made billions avoiding the P/E trap — here's the forgotten ratio he uses instead, and how it explains his controversial $$AAPL$$ bet.
Key Takeaways
- Uses owner earnings (net income + depreciation - capex) not GAAP EPS
- Prefers ROIC over P/E — AAPL delivers ~30% returns on capital
- Will hold cash for years waiting for 20%+ compounders
- Critics argue his framework breaks down in hypergrowth tech
Most investors obsess over price-to-earnings ratios. Buffett built his fortune ignoring them.
The Owner Earnings Framework
Buffett's 1986 letter defined owner earnings as "reported earnings plus depreciation, depletion, amortization, and certain other non-cash charges... less the average annual amount of capitalized expenditures." This explains why he bought KO in 1988 at 15x P/E (seemingly expensive) — its capex was just 3% of revenue versus 8-12% for peers. Today, KO still generates ~$9B annually in owner earnings.
Portfolio Proof: The Data Behind the Philosophy
| Ticker | P/E | Owner Earnings Yield | ROIC | Buffett's Entry Year |
|---|---|---|---|---|
| AAPL | ~28 | ~5.2% | ~30% | 2016 |
| BAC | ~11 | ~8.1% | ~10% | 2011 |
| KO | ~24 | ~4.8% | ~15% | 1988 |
| AXP | ~18 | ~6.3% | ~12% | 1964 |
| OXY | ~12 | ~9.4% | ~8% | 2019 |
Notice the pattern? None were "cheap" on P/E at purchase. AAPL's owner earnings have compounded at ~18% annually since his investment, turning $36B into ~$160B despite its "high" multiple.
The 2008 Case Study: Why Cash is a Position
During the financial crisis, Buffett deployed $25B when others were paralyzed — $5B in GS preferred stock (10% dividend) and $6.5B for WFC warrants. Both deals demanded >20% annualized returns with downside protection. As he wrote in 2009: "When it's raining gold, reach for a bucket, not a thimble." Critics note this approach missed the SaaS boom (CRM, NOW), but his framework intentionally excludes what he can't value.
What Buffett Would Buy Today
His recent moves suggest:
- Energy transition plays (OXY stake now ~25%)
- Capital-light insurers (BRK.B's float grew to $165B)
- Companies repurchasing shares at >10% discounts to intrinsic value (AAPL bought back $550B since 2012)
The risk? This ignores AI disruptors like NVDA — but as he quipped in 1999: "I don't invest in businesses I don't understand."
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See what Warren Buffett's formula says about your stocks
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View Buffett's valuationsFrequently Asked Questions
He focuses on durable moats — most tech fails his "10-year visibility" test. Exception: AAPL's ecosystem lock-in.
