The US recession is over. Buffett is still buying. Should you?
It's over -- according the world's most successful investor. This week Warren Buffett effectively called the end of the US recession, saying the economy has "sort of plateaued at the bottom." Only the day before, US Fed chairman Ben Bernanke said the recession "was very likely over." How should investors position themselves?
Earlier in the week, Buffett said that his Berkshire Hathaway is buying shares "because I am getting a lot for my money." That sounds encouraging enough, but does it mean that shares are, in aggregate, undervalued? Unfortunately not.
Buying ... Selectively
Buffett isn't an index tracking investor -- he purchases individual shares that he believes are undervalued. Meanwhile, with the FTSE 100 having rallied close to 50% from the March 9 market low, the stock market has lived up to its reputation as a leading indicator of the economy and then some, with current valuations suggestive of a robust recovery.
Indeed, the FTSE 100 index is currently priced on a P/E ratio of 16.4 times, at the top end of its long-term historical average. Just to really make sure you have your "market crash alert flag" hoisted high, the FTSE 250 trades on a P/E of 21.
The Old Animal Spirits Are Back
Rising share prices fuel confidence -- the resurrection of the mergers and acquisitions market is another by-product of that process. Just this week, for example, Balfour Beatty (LSE: BBY) announced it was buying US consulting and engineering group Parsons Brinckerhoff for £380m, the largest acquisition in the construction group's history.
Buffett himself highlighted an example of the "animal spirits" returning to the market. Calling Kraft's bid price for Cadbury (LSE: CBRY) "a full price," he added "I've got a lot of confidence in (CEO) Irene Rosenfeld, but they have to do a lot of things right to justify this price." Berkshire Hathaway is Kraft's largest shareholder.
Focus On Individual Shares
The US recession may well be over, but that is no reason to buy shares indiscriminately -- in toto, the market isn't cheap. If you wish to ratchet up your exposure to shares, the best course of action is to focus on individual companies that meet Buffett's standard -- i.e., make sure you're "getting a lot for your money."
Check out the following articles for some specific ideas…
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> A version of this article was originally published on Fool.com. It has been updated by Bruce Jackson, who has an interest in Berkshire Hathaway.
