Warren Buffett has a long track record of buying stocks that deliver high returns relative to the wider stock market. However, he doesn’t necessarily buy every company that he feels optimistic about. Sometimes, they may trade at prices too high to make a strong return in the long run.
Following a similar strategy in today’s market could be a sound move. Some FTSE 100 and FTSE 250 shares now trade at high prices following the recent stock market rally. By making a list of the best shares to buy, and waiting for them to trade at more attractive prices than they do now, it may be possible to obtain stronger returns in the long run.
Warren Buffett’s patient approach to investing in shares
Warren Buffett has always been a long-term investor. This means he’s not only patient when holding shares, but also when seeking to buy them. Clearly, it’s not possible to know how long he has waited before buying his current holdings or past successes.
However, the idea of making a list of high-quality businesses that do not trade at attractive prices, and waiting for them to do so, could prove to be a profitable move.
It may mean an investor avoids paying too much for any stock. This could be relevant in today’s stock market, where some growth sectors have premium prices. Instead, they may be able to capitalise on the ups-and-downs of the stock market through purchasing high-quality companies when they offer wide margins of safety.
A long-term stock market cycle
Of course, there’s no guarantee Warren Buffett’s strategy will work. An investor could identify the best shares to buy when they trade at high prices right now. However, they could fail to fall to sufficiently low prices to merit investment.
They may even deliver strong capital growth from a high starting price. In such a situation, an investor may miss out on a number of excellent buying opportunities during their lifetime.
However, avoiding expensive shares and instead buying good value companies could be a sound move. The stock market has a long history of experiencing periods of growth and periods of decline. Although neither can be guaranteed to take place in future, the past performance of indexes such as the FTSE 100 and FTSE 250 suggests such a repeat occurrence is very likely.
By identifying high-quality companies, as per Warren Buffett’s strategy, before they trade at attractive prices, it may also be possible to act swiftly during any future stock market crash.
The 2020 market slump took place in a matter of weeks. This highlights the need of having a cash position and a list of the best shares to buy. This could allow an investor to capitalise on temporary buying opportunities.