The investing community pays a lot of attention to Warren Buffett. Sometimes you have to look closely or read between the lines to see what he means, and recent events fall into that category, but his message is still loud and clear.
As a government company Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) provides quarterly performance updates. It also files a Form 13F, which details quarterly transactions.
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In the third quarter, Berkshire Hathaway reported it had $325 billion in cash on hand, its highest level ever. It was also a net seller of shares, a pattern that has persisted for several quarters.
Buffett has generally been transparent about his investing approach, which is quite simple: buy low and sell high, with some additional details. He is a proponent of the value approach to investing, and he doesn’t buy a stock unless he sees it as a great deal that could deliver tremendous value to his organization.
You don’t need to see Buffett’s public filings to understand that the market looks inflated today. The S&P500 is up 26% this year and trading at record highs. Stocks are trading at high valuations, and at current levels they could be due for a correction.
That doesn’t mean it’s going to happen tomorrow; Buffett has been preparing for some time now. But it will happen. I say that not because I can see into the future, but because that is the nature of the market. There are bear and bull markets, dips and corrections, and even crashes.
The question no one can answer is when. But it’s important to be prepared when it finally happens. Here are three things every investor should do.
It is important for everyone to have cash on hand in addition to your investments. First of all, you should keep an emergency fund for a rainy day.
Apart from that, you need to have money available for investments on a consistent basis. The most successful way to invest may be boring, but it’s safe and it works: invest consistently and let the magic of compounding do its work. Whether it’s $50 a month or more, every dollar you invest over time creates profits that would otherwise be unattainable.
If the market starts to look expensive, you may want to be more choosy about your investments and keep more money available for the inevitable dip.
‘What goes up must come down’ does not apply to everything; but it applies to unreasonable valuations. I didn’t say high valuations, or even rich valuations, because some premium valuations are justified. A company that is growing by leaps and bounds may have a higher valuation than a mature, slow-growing company.
But if a valuation raises eyebrows and investors continue to pour in money, that’s a signal to take a step back.
One of Buffett’s most famous quotes is: “We simply try to be fearful when others are greedy, and to be greedy only when others are fearful.” But fewer people know what he said next:
As this is written, there is little fear visible on Wall Street. Instead, euphoria prevails – and why not? What could be more exciting than participating in a bull market in which the rewards for company owners are gloriously decoupled from the struggling performance of the companies themselves. Unfortunately, stocks cannot outperform companies indefinitely.
You’d think investors would heed that wisdom, but there have been several skyrocketing bull markets (and crashes) since then. Buffett is currently acting on his own advice by avoiding stocks whose valuations appear disconnected from the performance of their businesses.
That doesn’t mean you can’t get a good deal today. Berkshire Hathaway took two new positions in the third quarter Domino’s Pizza And Pool company.
One of the reasons the markets crash is because of the disease that Buffett calls fear. Investors panic sell and lose their investments when they worry, creating a downward spiral. But long-term investors know that dips, corrections and crashes are part of being in the market.
For example, if you had sold at the start of the last bear market, you would have missed the incredible gains since then: the S&P 500 is up 67% since the start of the new bull market. Nvidia, the stock of the moment, has risen more than 1,000% since then, even though it lost half its value in 2022.
It’s more of a mindset than an action, and for investors it’s very simple: buy stocks you believe in and let time and the market do their magic.
Consider the following before buying Berkshire Hathaway stock:
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Jennifer Saibil has no positions in any of the stocks mentioned. The Motley Fool holds and recommends positions in Berkshire Hathaway and Domino’s Pizza. The Motley Fool has a disclosure policy.
Warren Buffett just sent a deafening warning signal to the market. 3 things investors need to do. was originally published by The Motley Fool
