A young Warren Buffett (Trades, Portfolio) discussed his views on the market and described the appropriate activities for money managers to follow in an overvalued environment.
“My view of the general market level is that it is priced above intrinsic value. This view relates to blue-chip securities. This view, if accurate, carries with it the possibility of a substantial decline in all stock prices, both undervalued and otherwise. In any event I think the probability is very slight that the current market levels will be thought as cheap five years from now. Even a full-scale bear market, however, should not hurt the market value of our workouts substantially.
If the general market were to return to an undervalued status, our capital might be employed exclusively in general issues and perhaps some borrowed money would be used in this operation at that time. Conversely, if the market should go considerably higher, our policy will be to reduce our general issues as profits present themselves and increase the work-out portfolio.
All of the above is not intended to imply that market analysis is foremost in my mind. Primary attention is given at all times to the detection of substantially undervalued securities.“
These few words cover a great deal of wisdom on how to go about the market:
1) Always have an overall sense of where the market is at a certain point in time.
2) Take profits when the tide is in your favour, and invest heavily (even borrow some money) when it’s not.
3) The detection of individual securities is the most important task of an asset allocator.
While we are looking for individual securities, we sometimes tend to forget that companies do not operate in a vaccum; that is, what happens to the economy and the overall stock market has a direct impact across the board. Also, whenever profits present themselves, it is important to take what has been generously given by Mr. Market. Also, and perhaps the most important thing, is that most of the energy available should be devoted to the identification of individual securities that might turn out to be attractive.
What are your thoughts on Buffett’s remarks?
Also check out:
