Looking at the UK stock market’s performance so far this year, it can seem as if things are going brilliantly. After all, the FTSE 100 index of leading British companies has hit new all-time highs on repeated occasions, including over the past month. But such an environment also gives me pause for thought – and to consider some of the stock market wisdom of billionaire investor Warren Buffett.
Fear and greed
For example, Buffett cautions investors to be fearful when others are greedy and greedy when others are fearful.
Just because the FTSE 100 has hit an all-time high does not in itself necessarily mean that investors are being greedy.
But, taken together with the AI stock boom Stateside, I do think that there is a fair whiff of greed about markets this autumn.
That makes me think I should be somewhat fearful in deciding how to invest rather than getting carried away with exuberance.
Taking the long-term approach
Warren Buffett has also said that if the stock market closed for a decade, it would not bother him at all.
He is not talking about the actual risk of such a shutdown. Rather, the point I think he is making is that he is buying into companies he believes are undervalued relative to their long-term commercial prospects.
So whether a share he owns goes up or down in the short term does not matter to him. He is a conviction investor who invests for the long haul. Looking at some of the frenetic activity in the current market – and again the AI boom springs to mind – I think that can act as a useful reminder for myself and all investors.
Rather than investing (or even speculating) in the hope of a short-term profit thanks to a soaring share price, I am trying to focus on buying into brilliant companies for what I think could be a bargain price given a long-term perspective.
Sticking to the known
Is Palantir (NASDAQ: PLTR) an amazing growth story that deserves its price-to-earnings ratio of 519 (yes, 519!)?
Or is it the sort of frothy stock that has signalled a market out of control at various points across history?
On one hand, I see quite a lot to like about Palantir.
It has a proprietary product that sophisticated, deep-pocketed clients seem to value highly. That client base is also impressive and having embedded itself in organisations around the world, I think Palantir could build its revenues strongly in years and perhaps even decades to come.
Are there risks? Of course, as with any share.
Even setting aside the valuation momentarily, one risk I see is that very client list. Some of its more politically controversial clients pose reputational risk for Palantir, I reckon.
But aside from such risks and that sky-high valuation, I have a more basic reason for not buying Palantir stock.
I simply feel I do not understand its core product offering well enough to assess how sustainable the firm’s competitive advantage is.
Warren Buffett emphasises the need for investors to stay inside their ‘circle of competence’ when investing. I am paying attention to that.
