The Oracle of Omaha and ace investor Warren Buffett advises investors to invest in the securities of companies when they are undervalued, and not when their prices are on a rise. While selecting the good companies to invest into, one should not get carried away during the bull market, the legendary investor and Berkshire Hathaway’s chairman and CEO, advises.
He says that investors should weigh their decision on the fundamental attributes of the business rather than the size of returns given by the stock in the recent past.
He calls this avoidable practice of looking at the past returns as ‘looking into the rear-view mirror’. While sharing his opinion, he opines that investors behave in a very human way which is they get very excited during the bull market.
“They look at the rear-view mirror, and say ‘I made money last year and I want to make more money this year’, and so they borrow. They all see in the rear-view mirror and they see a lot of money having been made in the last few years, they plough more money, and push and push and push the prices,” he had said in one of his public addresses.
And again, when they see in the rear-view mirror later, and see no money having been made, they say it is a lousy place to be.
“So, they don't care what is going on with the underlying business. And it is astounding. But that makes for a huge opportunity,” he said.
The same principle applies to the upcoming sector as well. Just because some industry is booming at present is no proof that it will continue to grow at the same or faster pace in future. He gives the example of automakers in the early 20th century. Over 2,000 auto companies entered the market that time, but only three were left by 2009.
Invest in sound companies
He urges investors to invest only in those companies that are worth investing in. And in case there are not any good businesses to go around, it is better to keep the cash and wait for the right opportunity.
In a letter to shareholders in March 2022, Warren Buffett wrote that Berkshire’s balance sheet includes $144 billion of cash and cash equivalents.
He said the company has 80 percent or so position (and not 100 percent) in businesses only because of its failure to find companies that meet the criteria for long-term holding. But he admitted that it’s not good to hold massive cash reserves.
No matter how good a stock is, and what its fundamentals are, it is imperative to figure out whether the stock shows its intrinsic worth. And if it does not, then it should not be bought at that price.