The stock market's bull run since the 2020 market crash is not a unique event in its nature, though it has perhaps been unique in its extremity. There have been similar surges in stock prices in the past that disconnect with market reality, with them all having eventually been followed by a bear market.
Therefore, it could be logical to consider the viewpoints of successful value investors while previous bull markets were taking place. They may be able to offer guidance on how investors should apportion capital today.
Buffett's comments during the tech bubble
Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) chairman Warren Buffett (Trades, Portfolio) is an obvious example of such an investor. He has experienced numerous bull markets and bear markets during his investment career.
In his annual shareholder letter in March 2000, Buffett discussed his views on stock market valuations following the S&P 500's 16% annualized gain over the previous decade. He stated:
"Right now, the prices of the fine businesses we already own are just not that attractive. In other words, we feel much better about the businesses than their stocks. That's why we haven't added to our present holdings. Nevertheless, we haven't yet scaled back our portfolio in a major way: If the choice is between a questionable business at a comfortable price or a comfortable business at a questionable price, we much prefer the latter. What really gets our attention, however, is a comfortable business at a comfortable price."
Following Buffett's shareholder letter, the S&P 500 experienced further gains for around six months. However, it then entered a bear market that saw 45% wiped off its value over a period of two years.
Avoiding unattractive stocks in today's market
In my view, Buffett's comments are extremely relevant in today's stock market. The S&P 500 may not necessarily fall in the next six months, as it did following his shareholder letter in March 2000. However, some high-quality businesses with wide economic moats currently appear to trade on excessively high valuations. They seem to offer little or no margin of safety, with investors pricing in a future that does not factor in the risks they face.
Similarly, some cheap stocks may still be available to buy even after the recent bull run. However, in some cases they are low-quality businesses that lack a clear competitive advantage versus peers. Meanwhile, other cheap stocks operate in industries that lack long-term growth potential.
Avoiding these types of investments, as Buffett did in 2000, could be a sound long-term move. The inevitable bear market that will follow the current bull market could mean that buying opportunities are more favorable further down the line. Equally, the next economic downturn may harm unattractive businesses to a greater extent than their peers.
Holding stocks and cash
Of course, Buffett's statement included the fact that he did not sell Berkshire's existing holdings in 2000. Even though selling stocks in March 2000 may have ultimately allowed him to buy them back at lower prices less than a year later, timing the market has always been an impossible task due to the infinite number of variables that can impact stock prices.
Therefore, holding high-quality businesses and building cash reserves could be a sound move in today's market. It may allow an investor to capitalize on further potential gains in equity markets, while having the capacity to take advantage of the next bear market. This strategy aided Buffett's performance in 2000 and since then, which may in itself be indicative of its usefulness to value investors at the present time.
Disclosure: The author has no position in any stocks mentioned.
Read more here:
- Seth Klarman: Industry Knowledge Can Provide an Investing Edge
- Mohnish Pabrai: Patience Is Your Most Valuable Asset
- Bill Ackman: Invest Using Fundamentals Instead of Emotions
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
