Outside the Box: Here’s why earnings multiples of stocks are misleading

“You have to earn the right to use a multiple” — simple, yet profound, words from investor Michael Mauboussin.

I learned this lesson the hard way. My first experience with “investing” — and I use quotes because what I was actually doing is an insult to real investors — was picking stocks based on a ratio I found on the internet.

Here’s how the “process” went:

Go to Yahoo Finance and look at how the P/E (price-to-earnings) of home-improvement retailers Home Depot HD, -0.24% compared with Lowe’s LOW, +1.26%

• Buy the one with the lower ratio.

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