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Warren Buffett’s best advice for 2017

The FTSE 100 climbed 14.4% during 2016 to end the year at a new all-time high of 7,143. And the first weeks of January have seen a run of further record highs. At the same time, 2017 is set to be a year of considerable uncertainty and potentially volatile markets.

The question of Brexit looms large and Donald Trump’s plans for the US are still rather sketchy at this stage. European elections — notably in Germany, France and the Netherlands — could be destabilising for the EU. Meanwhile, concern about China’s growth, which was prominent this time last year, remains a lurking shadow.

Warren Buffet’s counsel to investors to be “greedy when others are fearful and fearful when others are greedy” could prove to be the best advice for 2017.

Greed is good when fear abounds

The Footsie may be hitting new all-time highs but market valuations, such as forward earnings multiple and dividend yield, are reasonably attractive. We’re a long way from being in bubble territory, which is the kind of time to be fearful when others are greedy. As such, I’m more focused on opportunities to be greedy when others are fearful.

The reward for being greedy at such times was amply illustrated during 2016. This time last year analysts were busy undercutting each other on predicting how low the price of oil might fall. The sector was gripped by fear and shares of the likes of Shell and BP were hitting multi-year lows. Greedy investors who bought these two stocks at the start of the year saw gains of 53% and 44% by the end, as the oil price recovered and sterling weakness following the Brexit vote made dollar earners increasingly attractive.

The referendum result provided another opportunity for investors to be greedy when others were fearful. UK-facing companies, particularly cyclical businesses and sectors — such as Lloyds in financials, Persimmon in housebuilding and Marks & Spencer in retail — were hammered by the market, as fears of an economic slowdown or full-blown recession reigned supreme.

Where to be greedy today?

The big oil companies and other resources stocks, such as miners Rio Tinto and Anglo American, are obviously not as attractively priced now as they were a year ago, while the shares of many financials, housebuilders and retailers have seen quite a recovery since the Brexit vote.

The fear factor hasn’t entirely receded from these sectors (particularly with regard to UK-facing cyclicals) but I see an opportunity to be greedy with a rather different set of companies right now. As it happens, these companies are the sort of quality, non-cyclical businesses that are very much associated with Buffet’s investment approach.

Unilever, for example, lagged the market in 2016, notably in the latter part of the year, finishing 10% down from its October high. Nick Train, a.k.a. ‘Britain’s Warren Buffett’, has commented that “these so-called defensives now seem more attractive to us than ever”. I agree with Train and think that Unilever and other stocks he mentions in the same breath, including Diageo, Relx and Sage, are worthy of greedy consideration by investors at this time.

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G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended BP, Diageo, Rio Tinto, Royal Dutch Shell B, and Sage Group. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.