Warren Buffett once famously said, "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." It could be somewhat challenging for investors to apply this maxim in today's stock market environment, though. Both fear and greed are present.
Does Buffett think now's the time to buy stocks? Here's what's on his mind, based on his recent letter to Berkshire Hathaway (BRK.A 0.64%) (BRK.B 0.54%) shareholders.
Image source: The Motley Fool.
Buffett's present mindset
Buffett stated unequivocally in his recent shareholder letter that he prefers to own equities -- whether entire companies or publicly traded stocks. He said that he's "always kept at least 80% of my net worth in equities," and added that his favorite level is 100% in equities.
However, he acknowledged that Berkshire is closer to the 80% mark right now. The company has an enormous cash stockpile of $144 billion.
Why haven't Buffett and the other Berkshire investment managers put more of this money to work? They certainly would like to invest more heavily. However, Buffett stated bluntly, "Today, though, we find little that excites us."
High stock valuations appear to be the primary issue. Even with the latest pullback, the S&P 500 trades at a forward price-to-earnings ratio of 19.7, well above its historic average. Buffett even noted that valuation was an important consideration in buying back shares of Berkshire. He wrote to shareholders, "We don't want to overpay for the shares of other companies, and it would be value-destroying if we were to overpay when we are buying Berkshire."
It's also important to note that Buffett and his longtime business partner, Charlie Munger, don't try to time the market. He stated:
Please note particularly that we own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.
Applying Buffett's approach
Should we interpret Buffett's current mindset as meaning that it's best to avoid buying stocks right now? That would be taking the legendary-investor's comments out of context. Buffett didn't say there were no stocks worth buying.
Actually, Berkshire has been making a few stock purchases. I think that two of those buys, in particular, illustrate how other investors can apply Buffett's approach to their own strategies. Berkshire added to its position in Chevron (CVX 0.75%) and bought shares of Nu Holdings (NU -1.21%) for the first time.
Chevron and Nu are very different, but Buffett and his team like both of these businesses. Chevron is a giant in the energy sector and has near-term tailwinds with the current market dynamics, as well as long-term opportunities.
Nu is a Brazilian fintech company with tremendous growth prospects in Latin America.
Like Buffett, investors should be business-pickers instead of stock-pickers. And while the primary focus should be on the long term, it doesn't hurt if a business also has positive near-term catalysts, as Chevron does.
My background is in healthcare, so I naturally gravitate to healthcare businesses. I think Vertex Pharmaceuticals (VRTX 0.10%) is an example of a healthcare stock that shares some attributes that Buffett likes about Chevron.
Vertex is a giant in treating cystic fibrosis with the only drugs on the market that treat the underlying cause of the genetic disease. It has near-term catalysts on the way this year. Vertex and partner CRISPR Therapeutics hope to file for approval of a gene-editing therapy that could effectively cure rare blood diseases beta-thalassemia and sickle cell disease. Like Chevron, Vertex's valuation also looks really attractive.
Is there a healthcare counterpart to Nu? I think Teladoc Health (TDOC 0.30%) qualifies. Both fintech (for Nu) and virtual care (for Teladoc) are in their early stages of growth. Teladoc, like Nu, is targeting a massive addressable market.
The most important lesson
Perhaps the most important lesson from Buffett's shareholder letter is to be selective. Don't buy a stock just because it's down a lot from its highs. It could still be expensive.
No individual investor will have the kind of cash that Berkshire has. However, following the conglomerate's lead in building up a cash stockpile is a good idea. The time could come sooner than you think when there will be a lot of great businesses that are available at attractive prices.
Buffett noted that he and Munger have been cash-heavy at times in the past. He acknowledged, "These periods are never pleasant," but added, "They are also never permanent."
