This past weekend, fellow Fool contributor Manika Premsingh discussed some important investing lessons from Warren Buffett. Today I want to focus on another gem from the investing guru.
The FTSE 100 has been pummelled over the last three months as Brexit negotiations have failed to yield an acceptable resolution so far. The European Union and the UK have agreed to a January 31 2020 Brexit extension and the increase in investor anxiety over Brexit brings me to one of my favourite Warren Buffet gems.
Be greedy when others are fearful
One of Warren Buffet’s most repeated quotes is “Be fearful when others are greedy. Be greedy when others are fearful.” Buffett is a strong advocate of value investing, a philosophy first popularised by British-born investor Benjamin Graham. Value investing is an investment strategy that aims to pick stocks that are trading for less than their intrinsic or book value.
The cycle of greed and fear is one that plays out over and over. Investors often allow emotions to dictate their buy/sell decisions, which can lead to losses in the long term. So, what is the best way to follow this advice? First, we need to do our homework. That means identifying stocks that are undervalued. When the broader market is in flux, that makes the job a little bit easier.
In order to follow this tip, investors also need to learn to control their emotions. This sounds simple, but it can be very difficult. There is a wealth of information available to investors in the present day, but this can also be a curse as the herd instinct can take hold.
A stock I’m targeting with this tip in mind
Pearson (LSE: PSON) is a stock that has been hit in September and October. The shares have dropped 24.7% year-on-year as of late morning trading on October 28. In September, the FTSE 100-listed company downgraded its guidance and said that it now expects adjusted operating profit to be at the bottom of its £590m-£640m guidance range.
This is primarily due to weaker US higher education business. US students are shifting to materials that can be procured at a lower cost or for free. Higher education courseware in the US is now forecast to decline between 8% and 12% in 2019. However, Pearson still expects group revenue to stabilise this year.
Pearson should be tempting for investors who are on the hunt for a potential turnaround stock. Right now, the stock possesses a price-to-earnings ratio of 11.7 while also offering up a 2.8% dividend yield. The Relative Strength Index (RSI) is a momentum indicator that can be useful when I’m on the hunt for value. It is designed to chart the current and historical strength or weakness of a stock or market based on the closing price of a recent trading period. After its adjusted guidance, Pearson stock has fallen below an RSI of 30, and it remains at this level at the time of writing. This means the stock is in technically oversold territory and I think that can be considered a Buy signal.
Ambrose has no position in any of the shares mentioned. The Motley Fool UK has recommended Pearson. 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.