Having risen 7% since the start of the year, it’s clear the first six weeks of 2019 have been strong for the FTSE 100. After a challenging 2018, it’s been able to deliver a recovery that’s seen it come within 650 points of its all-time high. Investor sentiment appears to be improving, and this could mean the index has upward momentum in the near term.
Of course, deciding what to do as an investor in such scenarios can be tough. With this in mind, here’s how I think Warren Buffett might react to share price rises.
Perhaps the most notable aspect of Buffett’s investing style is his ability to ignore market noise. He doesn’t seem to be at all interested in the opinions of other investors. Therefore, share price rises and falls that are based on sentiment changing don’t appear to change his mind on a stock, or on its future investment potential.
Of course, that’s not to say that Buffett doesn’t use changes to investor sentiment to his advantage. In scenarios where they’ve become overly optimistic, he may take the opportunity to become more cautious. After all, no bull market has ever continued in perpetuity. Likewise, falling share prices provide him with the chance to buy stocks on low valuations, with fearful investors leading to share prices which, in many cases, may offer margins of safety.
The recent rise in the FTSE 100 is most likely due to changes in investor sentiment, since the outlook for the world economy hasn’t evolved considerably in the last six weeks. There are still notable threats facing world economic growth. For example, the US/China trade war could increase in severity, while a rising US interest rate could hurt the performance of the world economy in future quarters. As such, the risk/reward opportunity for investors may have worsened, rather than improved, following the FTSE 100’s recent rise.
Clearly, there continues to be a number of stocks within the index that could offer good value for money. Since the FTSE 100 has a dividend yield of over 4%, it appears to offer a margin of safety and may be able to generate high returns in the long run. Value investors such as Warren Buffett are therefore unlikely to find it too challenging to find high-quality stocks that offer wide margins of safety.
The key takeaway, though, is as the market rises, its investment appeal may decline. Paying a higher price for the same asset when it comes with the same level of risk as it did six weeks ago doesn’t seem to be particularly appealing. As such, while investors may now be more bullish and it could still be a good time to buy shares, dips in the index’s price level could make it an even more compelling investment opportunity.
Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.