Transcription
If I am going to make an investment in Nvidia, and so let's take Nvidia as an example. So, you know, there's a lot of buzz about it, right? The question I would have investors ask themselves is, everyone's chasing Nvidia, your coworker, your Uber driver, that guy at Thanksgiving who quote got in early, but the investor who turned $1 million into 1 billion since 2000 won't touch it. Monish has a one-line test that both Nvidia and Tesla fail hard. And if he's right, today's buyers might be starting at zero gains for the next decade. Let's hear why he's steering clear of the crowd favorites.
99% of stocks should go into what Buffett calls the too hard pile. Okay. So, there's actually a box on Buffett's desk which says too hard on it. Okay. Okay. And he actually has a has a like a like a box where you can put papers in which says too hard. Okay. When I went to his office, I saw that box and I said, "B. Warren, the box is empty." So he said, "Monish, it's not supposed to be empty." So he took a bunch of papers and dumped it on the in the box and said, "See, it's full now." Okay. So he was just he was just kidding with me, basically.
So if you ask me, okay, so what what does Nvidia look like 5 years from now or 10 years from now? It goes in the too hard pile. It's not a question I need to answer, right? So I only need to answer that question if I am going to make an investment in Nvidia. And so let's take Nvidia as an example. So you know there's a lot of buzz about it, right? The question I would have investors ask themselves is, tell me what you think Nvidia's cash flows are going to be 5 years from now, 10 years from now, 15 years from now. If you have uh if you know these numbers with high conviction, then the next question which is should you buy or sell Nvidia becomes obvious, right? Because you can look at those cash flows and decide the stock is too expensive or too cheap or whatever and make that decision. I don't know what Nvidia's cash flow is going to be 5 years from now or 10 years from now, 15 years from now. Too hard pile. Too hard pile. What is the other one you said?
Tesla. Tesla, definitely too hard pile. What I'm saying is it's a it's it's a tremendous company. It's done great. Um, the valuation doesn't make sense based on current cash flows, but we have Elon who's not human, you know, and uh, I mean, Elon is constantly underestimated by everyone. I mean, now he's fixing the US. That's incredible. So, it would fall in a too hard pile.
Pabry's rule is brutally simple. If you can't tell what a company will earn a decade from now, don't touch it. Investing isn't buying a flashy story. It's buying a series of future profits. If you have no clue what those profits might look like in 5, 10, 15 years, you're not investing, you're gambling. Let's quantify why Perry is so weary. Nvidia stock surged over a 1,000% since late 2022 and crossed a $4 trillion market cap by mid-2025. At that price, investors are betting that Nvidia's profits will skyrocket. If things don't go to plan, you may have to wait years for the business to catch up to the price you paid. Here's a simple example. Say you buy a corner bodega for a million, the one on your block with the good coffee. It makes 50k a year in profit. Unless that profit grows like crazy, you could be waiting 20 years to make your money back. That's the risk with a hyped stock at a sky-high PE ratio. You're paying champagne prices for a coffee shop.
And that brings us to the key lesson. A great company can be a terrible investment if you pay too much. Think about Tesla. In 2021, its value shot past $1 trillion on electric vehicle euphoria. Yet, its actual profits at the time didn't come close to justifying that price. Investors were banking on Tesla, conquering not just autos, but energy, self-driving, and who knows what else to deliver earnings years down the line. Pri isn't saying that Nvidia or Tesla are bad companies. He's saying he can't predict their futures precisely, so he won't name a price for them. That discipline keeps him out of trouble. How much trouble? Let's travel back to the last time investors paid nosebleed prices for quote can't fail companies.
I wrote an article I think in uh 2001 or 2002, maybe it was 2000, where I pointed out how overvalued Infosys was. Infosys was really ridiculously overvalued at that time in uh 2001, and for a long time, eight or nine years, the returns to investors were zero. But if you ignored Monish and you just held Infosys from then till now, you did extremely well. It got past that overvaluation, and the business kept growing and improving, and it's worked out very well. I had the same issue with Microsoft. Microsoft from 2000 to 2012, the returns were zero. For 12 years. 12 years zero returns. Okay. It wasn't just zero. It went from a 600 million market cap. 600 Yeah. 600 billion market cap, sorry. to less than 200 billion. So it wasn't just flatline, it was a serious drawdown and then coming back up. But for 12 years, if you just held for 12 years, you were zero, which is not a great result.
And there's an opportunity cost as well. There's an opportunity cost. But again, if you just held Microsoft from 2000 till today, it's not great, but you had about a 56x. Okay, you still had a 56x. That's great. Well, 56x for an average investor, 56x is 25 years is not that great. It's okay. But what I'm saying is that wall uh Microsoft was one of the most overpriced companies. It was one of the best companies at that time in 2000, but it was very overpriced. So it is in the nature of equities that they are going to get get into some periods when they get severely overvalued. There'll also be periods when they get severely undervalued, and there are periods when they may be normal. It's all of the above, right?
And if you are a no-nothing investor, buy the index. What's a no-nothing investor? A know-nothing investor who doesn't know whether a stock is Oh, no, okay, okay. Overvalued, undervalued, whatever. Who has no time to research. And and so but I'm just saying if the the no-nothing investor just buys the index, and the you know, the next the next HDFC or the next Asian Paints is in there. We just don't know which one it is, but it's in there, and you just let it stay in that index for 30, 40 years, and life is going to be great.
Microsoft, the dominant tech giant of 2000, 12 years with zero stock return. It wasn't that the Microsoft business failed. The company kept growing its sales and profits, but its stock had been priced so high during the dot-com bubble that even a great company couldn't live up to those expectations for a long time. A wonderful business bought at a foolish price will stagnate until reality catches up. Picture this. Jennifer, a software engineer, invested $10,000 in Microsoft at its 2000 peak, her entire bonus that year. Her colleagues called it the safest bet in tech. By 2002, she's watching $3,000 on her screen. She holds and keeps holding. It wouldn't get back to 10K until 2012. Her kids started middle school and finished high school by the time it took to break even. That's a lost decade in every sense.
So, what exactly went wrong? In 2000, Microsoft traded at a price-to-earnings ratio north of 60 times. Investors were paying over $60 for every $1 of the company's earnings. That lofty PE baked in years and years of future growth. Microsoft did grow. Its earnings roughly tripled from 2000 to 2012, but its PE ratio shrank to about 10 to 15 times as the hype died down. If earnings triple, but the multiple on those earnings fall by 75%, the stock stays flat. This is exactly the last decade trap. Early investors weren't crazy. Microsoft was an amazing business, but if you pay too much upfront, even amazing growth can leave your investment underwater for years.
Now look at today. Nvidia, Tesla, could they end up being this decade's Microsoft 2000? It's not a prediction, but it's a scenario savvy investors must consider. Here's the catch. If you avoid these hyped names entirely, you might miss out on gains if they truly transform the world. Tesla might sell tens of millions of cars and robots. Nvidia might power an AI revolution bigger than anything we imagine. But the approach is not about predicting winners. It's about avoiding losers or winning stocks bought at loser prices. It comes down to your circle of competence. If you can't reasonably estimate a company's future cash flows, don't invest. There are plenty of fish in the sea. The good news is you don't have to swing at every pitch. PBR even says that if you truly have no idea how to value stocks, just buy the index and hold it. The S&P 500 is full of both overhyped names and undervalued gems at any time. By holding the whole basket for the long run, you'll automatically catch the next Apple or Google without having to identify it up front.
But let's say you do want to pick stocks. How can you avoid falling into the last decade trap? First, internalize PBR's question as your own. Can I predict this company's cash flows 5, 10, 15 years out with any confidence? If the answer is no, it belongs in your personal quote too hard pile. Move on. Second, pay attention to market euphoria versus fundamentals. Is everyone talking about the stock like it's a can't miss, must own, sure thing? When CNBC runs the same ticker for 3 hours straight and your group chat won't shut up about it, that's your signal to ask harder questions, not easier ones. When the stock's narrative becomes "this will change everything," "it can only go up," and people stop asking "at what price," it's time to be very cautious. None of this is to rain on innovation. We want to own great businesses, ideally at great prices. Prize's strategy is about being patient for those great prices. He'd rather sit on cash than chase the hot stock everyone loves.
Could Nvidia or Tesla ever trade at a sane multiple? Possibly. If the hype cools or they stumble temporarily, maybe that's when a value investor pounces. The lost decade trap is something you can avoid. It takes humility, admitting some businesses are beyond forecasting, and discipline to sometimes sit out of the game everyone else is playing. The reward is that you won't wake up in 2035 holding a stock that hasn't budged since 2025. So the next time you're tempted to buy the latest high-flyer at any price, ask yourself, do I really know where this business is headed in a decade? If not, there's no shame in saying, "too hard for me," and moving on.
If you found this valuable, check out our next video where Ray Dalio calls out a storm brewing in the stock market. Next, I will see you over.