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Robert Stephens, CFA
Robert Stephens, CFA
Articles (406) 

Warren Buffett: A 'Dull' Investment Strategy Can Be Profitable

A simple approach may lead to higher returns

October 12, 2020 | About:

Some investors may view the current bull market with great excitement. They may become more optimistic about the prospects for their holdings due to improving financial forecasts and stronger investor sentiment.

However, in my view, bull markets can be a dangerous time to buy stocks. Margins of safety may be narrower, and investors may not have factored in economic and political risks that may be ahead.

Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) chairman Warren Buffett (Trades, Portfolio) has always sought to avoid overexcitement during bull markets. His strategy has focused on simplicity and relying on company fundamentals, rather than following the views of bullish investors. This could be a key reason for his long-term outperformance of the stock market.

Sticking with your investment principles

It is tempting to focus on a company's improving financial forecasts in a bull market. For instance, investors may pay an increasing amount of attention to rising profit estimates for a company to justify its rich valuation.

However, forecasts are unreliable. It is impossible to accurately and consistently predict the future prospects of any business due to a wide range of variables that can affect its performance.

A better idea could be to stick with basic investment principles. For example, seeking to purchase quality businesses when they trade at prices that represent a discount to their intrinsic values.

This may mean that you miss out on highly-valued growth stocks that go on to produce strong capital returns in the short run. However, it can also allow you to avoid stocks that are overpriced based on overly enthusiastic investor sentiment.

Buffett has always sought to use a simple strategy that is relatively unexciting. As he once said, "Beware the investment activity that produces applause; the great moves are usually greeted by yawns."

Analyzing company fundamentals

The stock market's 50% rise since March may cause some investors to overlook a company's fundamentals prior to purchase. They may think that recent market trends will continue, and it is less important to understand a business before buying it than was the case during the recent bear market.

However, analyzing company fundamentals is a productive use of your time in any market conditions. For instance, a bull market may be in existence at the moment. But their average length has been around three years since World War II.

Therefore, recent stock market gains are very unlikely to continue forever. You may be able to allocate your capital more efficiently by ensuring that your holdings are not overvalued and have sound finances. In addition, taking the time to analyze a business may allow you to identify risks that have been overlooked by other investors.

As Buffett once said, "Never invest in a business you cannot understand."

A long-term viewpoint

The current bull market may encourage investors to become more speculative when managing their portfolios. They may assume that market sentiment will improve, and that they can sell overvalued stocks before the next bear market commences.

However, in my view, speculation is very risky in any market conditions. A more productive use of your time may be to adopt a long-term viewpoint that aims to benefit from the stock market's growth potential in future years.

A long-term standpoint can give your current undervalued holdings sufficient time to trade closer to their intrinsic values. This process can take many years; particularly with economic and political uncertainty being high at the moment.

As Buffett previously said, "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

Disclosure: The author has no position in any stocks mentioned.

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