It has been a week to pop the champagne corks, with the FTSE 100 index of leading blue-chip shares reaching a new all-time record high. That may seem like a cause for celebration, but it also brought to mind for me some advice from billionaire investor Warren Buffett.
Buffett famously cautioned investors “to be fearful when others are greedy and to be greedy only when others are fearful”.
A record-setting index could mean that some investors are getting greedy. So, might now be the time to be fearful as an investor?
What Buffett sees as an opportunity
When Warren Buffett talks about being fearful, it may sound like a possible cause for concern.
Then again, he is also on record as saying that he wouldn’t trade a second of good sleep for extra profits. So, what is he getting at when he talks about being fearful when others are being greedy?
The way I interpret that is as a caution against being carried away with the excitement of a strongly performing market. Just because the market is doing well does not necessarily mean that it will keep doing so.
Importantly, Buffett’s approach is not simply to avoid the market when it does particularly well. He does what he always does, which is looking to buy into “great companies at attractive valuations”.
Even when the market overall is riding high, that does not mean that all shares are doing well.
Looking for quality at the right price
For example, one share I have bought this year is Diageo (LSE: DGE).
While it has a stake in Moët Hennessy, I suspect that Diageo’s chief executive may not have been popping any champagne corks this week despite the FTSE 100 hitting new highs.
That is because it was announced that she was leaving the Guinness brewer. Its share price has fallen precipitously under her relatively brief leadership and the Diageo share price is now 32% lower than five years ago. Clearly, many potential Diageo investors have grown fearful. By contrast, I have been what Warren Buffett describes as greedy, scoping up Diageo shares for my portfolio.
I hope the next boss does better, but the company’s challenges are not limited to just its choice of chief executive. Many of Diageo’s premium spirit brands continue to fight weak demand in key markets.
Younger generations are less likely to drink alcohol than their older relatives. That could mean a long-term demand decline like we have seen in the tobacco industry.
Still, I reckon Diageo has a lot going for it even now. It owns plenty of strong brands that give it pricing power, a business attribute Warren Buffett values highly. Indeed, Buffett invested in Diageo’s predecessor company some decades ago.
Diageo is massively profitable. It is also one of only a few FTSE 100 companies to have grown its dividend per share annually for decades.
The Diageo share price is still not exactly a screaming bargain. It is selling for 16 times earnings. But I see that as an attractive price for what I reckon is a great business.
