Buffett stated that he is interested in predictable businesses and he uses the interest rate on the 10-year treasury bond in his calculations. Therefore, an investor has to be fairly certain that a company will be profitable in the future in order to consider it to be undervalued. For example, if a risky stock has a PE ratio of 5 and the company becomes bankrupt, this would not be an undervalued stock.
Buffett emphasizes that he prefers predictable businesses and uses the interest rate on the 10-year treasury bond for his assessments. Consequently, investors must be reasonably certain about a company's future profitability to consider it undervalued. For instance, if a risky stock has a PE ratio of 5 and the company goes bankrupt, this would not indicate an undervalued stock.