There’s increasing chatter that some sectors, such as artificial intelligence (AI), are pushing stocks into a bubble. Bubbles always pop at some point, although it’s hard to tell if the market’s overvalued or simply benefiting from huge growth rates. When it comes to trying to figure it out, advice from legendary investor Warren Buffett can be very helpful.
Thoughts from the great man
Buffett was quoted as saying to be “fearful when others are greedy and greedy when others are fearful”. When everyone around you is euphoric and prices are skyrocketing, it often signals a bubble. That’s when valuations detach from fundamentals and can result in a lower correction.
The lesson from this for investors is not to chase hype or simply FOMO (the fear of missing out). The best opportunities often appear after a bubble bursts, when fear dominates and good businesses trade at discounts.
Another good piece of advice from Buffett comes from when he spoke about “the stock market is a device for transferring money from the impatient to the patient”.
When the stock market is pushing fresh highs, short-term traders pile in for quick gains. Yet disciplined investors wait for real value. Over time, patient investors who focus on intrinsic worth end up holding the best assets at the right prices.
I think this is a well-made point: even when some are concerned about a bubble forming, there are still good stocks trading at attractive levels to consider.
An example to prove the point
Despite the FTSE 100 recently hitting record highs, Rio Tinto (LSE:RIO) isn’t even at 52-week highs. It’s up 2.7% over the past year, with a price-to-earnings ratio of 10.17. I use a benchmark figure of 10 as a reasonable value, with the FTSE 100 average ratio at 16.6.
Therefore, on those metrics alone, I’d say that Rio Tinto stock isn’t in a bubble and actually could be considered an attractive purchase right now.
Fundamentally, things also look good. The business is making a strategic pivot from being heavily dependent on iron ore to increasing its exposure to copper and related metals. These are in higher structural demand thanks to electrification and renewables. As a result, this could help it to do well in the coming year and beyond.
Of course, one risk is volatility in the share price. This is linked to the fact that the stock’s movements are closely related to the price of commodities. Unfortunately, this isn’t something that can be eliminated. But with a diversified portfolio, the overall company risk can be reduced.
I think investors can consider Rio Tinto, which imitates the advice from Buffett, particularly about being patient. Sure, tech stocks might be hot property right now, but adding value plays like Rio Tinto could offer smoother portfolio performance for the road ahead.
