I was right in predicting another Covid-19 wave and stock market crash. Many investors are scared but these investing tips from Warren Buffett are as relevant as ever, I feel.
Warren Buffett’s recent actions
Many people have great respect for Warren Buffett, an outstanding American investor and billionnaire. He is famous for buying excellent companies at fair prices. However, he disappointed many of his admirers since he failed to use his large pile of cash during the March sell-off. He did so for several reasons. First, the Fed, just like central banks in other countries, reacted so quickly that the bargains disappeared pretty fast. Second, Buffett’s Berkshire Hathaway is not just an investment fund. It is also an insurance company. So, lots of cash is necessary for Berkshire to do business during periods like this. Finally, he sees some volatility and hopefully some great bargains ahead.
This means that by keeping some spare cash we too can look for some great stock picks. The current S&P 500‘s price-to-earnings (P/E) ratio is about 21, whereas the FTSE 100‘s P/E ratio is just over 14. So, it could be argued that there are more undervalued companies in the UK than there are in America.
Buffett’s investing tips
It seems logical to follow some of his investing tips on choosing the right time to buy ‘good’ stocks:
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
It is an excellent piece of advice. It is worthwhile for an investor to sell when a particular company’s shares are at record highs but its fundamentals don’t inspire too much hope. However, a smart investor should not be afraid of stock market crashes. Instead, these situations should be embraced. You can make great buys when stock indexes fall. But it’s important to choose carefully!
“Price is what you pay. Value is what you get.”
This recommendation is about choosing carefully. A particular stock can be either cheap or expensive. The worst thing you can do is overpay for a poor company. How do you know if a company is poor and expensive? Well, you should calculate the multipliers such as price-to-earnings (P/E) and price-to-book (P/B) ratios. The lower they are, the better it is. A ‘good’ company should also ideally pay dividends. Checking a company’s credit ratings is important too since they reflect the company’s financial health.
“It’s only when the tide goes out that you discover who’s been swimming naked.”
This is another one about a company’s soundness. Loss-making companies’ shares tend to crash dramatically during crises as opposed to profit-making firms’ stocks. For example, in March, Aston Martin‘s shares declined much more than Rio Tinto‘s stock. This is because the former is both loss-making and has a low credit rating, whereas mining company Rio Tinto enjoys the reputation of a low-debt, profit-making company.
“Our favourite holding period is forever.”
This means that once you find such companies, you should to stick to them for years, if not forever. Good companies tend to appreciate over long term. There is, however, a risk that their shares will stay depressed for some time during recessions. But once the dust settles, they will most probably continue rising in value. At the same time, the shareholders will keep receiving dividends.
