Warren Buffett: Don't Cheer When the Stock Market Soars
- By Robert Stephens, CFA
Many investors will be pleased with the performance of their portfolios in 2020. Although the stock market declined as much as 34% in the first quarter, it has since made new record highs. As a result, many investors will find that their holdings generate profits this calendar year.
In my view, it might be illogical for some investors to cheer the rising stock markets. A large number of them are likely to be net buyers of stocks rather than net sellers in the near future. This means that they will be buying more monetarily worth of stocks than they were in 2021.
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BRK.A 15-year financial data
The intrinsic value of BRK.A
Peter Lynch Chart by BRK.A
A rising stock market generally means that it is harder to find stocks that offer wide safety margins. Therefore, instead of feeling encouraged by the recent spike in the S&P 500, investors should worry about how they're going to allocate capital in a highly rated stock market.
Buying opportunities on today's stock market
This year's stock market surge is largely due to the increasing popularity of tech majors and growth stocks. Industries like technology saw rapidly growing valuations, partly due to increasingly optimistic growth forecasts.
At the same time, many stocks that are trading at a discount to their intrinsic values have not achieved similarly high returns. This can result in value investors being disappointed in the performance of their portfolios. They may find it difficult to watch growth investors deliver high returns while their portfolios lag behind the broader market.
However, stocks that are steadily growing in value may be more attractive than companies with fast returns. They give investors a greater opportunity to buy at discounted prices over a longer period of time. In the long term, this can lead to higher returns, which have a more positive impact on portfolio valuations.
Buffett's letter to shareholders from 1978
This point of view was carefully summarized by Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) Chairman Warren Buffett (Trades, Portfolio) in his 1978 letter to shareholders:
"We are not concerned about whether the market is rapidly appreciating securities that we believe will be sold at bargain prices. In fact, we prefer the exact opposite, as most years we assume funds will be available In order to be a net buyer of securities. A consistently attractive purchase should ultimately prove to be more beneficial to us than any sales opportunity that results from a short-term rise in share prices to a level where we no longer want to buy. "
Undoubtedly, an investor who is likely to be a net seller of stocks in the future will of course be fueling a rising stock market. They can sell their positions at higher prices, which can involve significant profits.
However, an investor who is likely to be a net buyer of stocks in the near future may be better off ignoring the ups and downs of the stock market. This can have the added benefit of making it easier to put emotions aside so that they can efficiently allocate capital to quality companies that trade at fair prices.
These companies may not have reached their potential in 2020. However, this provides value investors with more options to tap their long-term growth potential in the future while trading at large discounts on their intrinsic values.
Disclosure: The author has no position in the stocks mentioned.
Read more here:
Peter Lynch: Basics beat forecasts
Howard Marks: Overpayment for stocks is a dangerous game
Seth Klarman: Mixing investing with emotions is not the same as success
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This article first appeared on GuruFocus.
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