The year 2020 has been a year of many records. Away from the coronavirus pandemic, the financial world has seen a record amount of money printing and stock market volatility. The total value of negative-yielding debt has hit a record, and so has the number of unprofitable companies seeking to go public. The valuations of unprofitable businesses have also jumped to record heights, and at the time of writing, the S&P 500 is also trading at a record high.
When we take a step back from our screens, this does not make much sense. The pandemic is not over. It's still raging in many areas of the world. Vaccines may be on the way, but they're not here yet.
What's more, the economic scars of the pandemic are only just starting to show. Tens of millions of people around the world remain unemployed, and projections suggest that levels of poverty in the developed and developing world are going to increase this year for the first time in decades.
But it seems as if the market doesn't care about these issues. The current valuations suggest investors believe companies will continue to register explosive, uninterrupted earnings growth for the next decade.
Impossible to predict
Is this likely to happen? Maybe. Maybe not. Unfortunately, it's impossible to predict, and that's why investors shouldn't try. The current market environment suggests euphoria, which implies there could be a crash on the horizon.
Considering the fundamentals of the global economy, that does not seem like an unrealistic statement. However, trying to predict the long-term performance of the stock market never works out well.
This is something I've been thinking a lot about recently. I feel as if the market is overvalued, but I'm well aware that it's impossible to tell what's next. With that in mind, I recently decided to go back and take a look at some of Berkshire Hathaway's BRK.A BRK.B annual meeting videos from around the time of the first dot-com bubble.
Throughout his career, Warren Buffett (Trades, Portfolio) has experienced numerous bull and bear markets, and he knows a thing or two about how to trade these markets. At the conglomerate's 1999 meeting of shareholders, which took place near the dot-com bubble peak, one investor asked Buffett to comment on the level of the market. Here's what he had to say:
"We look at individual businesses. And we don't think of stocks as little items that wiggle around on the paper and that have charts attached to them. We think of them as parts of businesses. And it is true that, currently, we have great trouble finding businesses that we both like and where we like the management and that they — and find them at an attractive price. So, we do not find bargains in this market among the larger companies that are our universe. That is not a stock market forecast in any way, shape, or form. We have no idea whether the market is going to go up today, or next week, or next month, or next year. We do know that we will only buy things that we think make sense, in terms of the value that we receive for Berkshire. And when we can't find things, the money piles up. And when we find — when we do find things, we pile in."
I think this quote is highly relevant to the current market. It does not matter if you believe the market will rise or fall over the next few weeks or months. Buying high-quality stocks at attractive prices will never go out of favor. The rest of the time, waiting for these opportunities might be the best course of action. Good companies will always be able to grow their net worth, no matter what happens to the rest of the market.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Warren Buffett: How to Build a Framework to Buy Good Companies
- Why Isn't Charlie Munger Selling Wells Fargo?
- Why Berkshire Hathaway Continues to Own Struggling Businesses
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