It has been said that imitation is the sincerest form of flattery. I wonder if Warren Buffett (one of the most respected and famous investors of our generation) knows how much others try to imitate his style of investing. Either way, his comments and advice over the years leave me with plenty of ideas of how I think he would go about investing in the current climate.
Allocate to undervalued stocks
If I had £1,000 to park, with half of it, I’d put it in stocks that I believe are undervalued. This ties in with a comment from Buffett back in 1991 when he said advised us to “just buy something for less than it’s worth.”
Obviously, there’s a slightly tongue-in-cheek tone about his note. It goes without saying that I’d never knowingly overpay for something. But when it comes to the stock market, it isn’t easy to always know what the fair value should be.
One way I’d filter for stocks to buy would be via the price-to-earnings ratio. It’s a straightforward metric that compares the latest earnings per share to the current share price. If the figure is very high, chances are the share is expensive. Conversely, a low figure shows that (relative to current earnings) the share price could offer good value.
At the moment, I can count over a dozen FTSE 100 stocks with ratios below 10. Not all of these are going to be perfect, but it’s certainly a good place for me to start looking.
Not waiting for something better
During one of the most volatile years for the stock market this century, Warren Buffett said in 2009: “Don’t pass up something that’s attractive today because you think you will find something better tomorrow.”
Back then, the market was reeling from the financial services crash. Notably, Buffett invested a lot during that period. There were attractive opportunities that he took advantage of.
With my £1,000, it doesn’t make sense to invest everything in one go. Yet at the same time, I don’t think it’s wise to sit on my cash and wait for a potential crash. There are good options right now. Sure, it looks like the trend might be lower over the winter ahead. But no one knows this for sure.
A risk would be that I miss out on potential gains by sitting on my hands for the next few months.
Warren Buffett says boring isn’t bad
One quote from the great man that makes me chuckle is: “Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”
There’s a lot to be said for investing in defensive stocks that have survived many recessions over decades. Utility companies, big pharmaceutical names and others are good homes for my money. The businesses might not excite me in the same way as a hot-shot tech start-up that has just gone public. But ultimately, I want my money to appreciate in value with the lowest possible risk attached.