Let’s just get this straight: Warren Buffett has not indicated an imminent market crash is coming.
The Oracle of Omaha has indeed done some tweaking to his portfolio to adjust for the new era of heightened valuations we’re in. He’s trimmed his stakes in financials stocks and added some exposure to gold. In fact, I really like his addition of Canadian gold miner Barrick Gold. However, I think fellow Fool contributor Jitendra Parashar misquoted Warren Buffett in a recent article in which he indicated Buffett said the market was on the verge of a terrible crash.
Since no one knows what’s going on inside one of the most brilliant minds in investing, let’s focus on the facts.
Low interest rates mean higher valuations could be here for a while
With expectations that near-zero interest rates could be here until 2024 or beyond, stocks have soared. Many financial experts believe the heightened valuations we’re seeing are reflecting this “new normal” of monetary policy we’ve seen put in place by central banks globally. In other words, stocks could be correctly priced today. This makes sense, if one believes in the efficient market hypothesis.
Warren Buffett and most money managers out there are not jumping ship right now. Trimming is one thing, but all-out selling for fear of a market crash is not the way to invest long term. Rather, Warren Buffett’s track record of picking up beaten-up stocks in down cycles deserves some serious consideration for long-term investors. Long-term investors should consider holding through periods of heightened valuations like today and hoarding cash. Doing so will allow investors to buy stocks when they’re trading at ridiculously low prices. This is a recipe for success.
Those who want to take Warren Buffett’s advice of being “fearful when others are greedy” should do so. But believing the market will crash tomorrow is dangerous, as this could force some long-term investors out of the market. Indeed, many investors who sold at March lows, exited the market, and failed to re-enter missed out on a pretty good year last year.
Money has nowhere else to go
Yes, stocks are expensive right now. The thing is, with bond rates where they are currently (essentially zero), money has nowhere else to go. Indeed, capital (or liquidity) is liquid, like water, and flows where it can generate the best returns. In this current macroeconomic environment, there’s only one place for capital to go. That simply means investors need to get used to these valuations for the next few years or stay out of the market.
Since Warren Buffett has not sold everything and gone home, I’m assuming he believes that whatever volatility may arise is worth holding through. I think investors need to be wary of the headlines out there warning of imminent market crashes right now. Most of the greatest money managers out there think the economic conditions are primed for a recovery. This is a very different outlook. Betting against the flow of the market has been disastrous this past decade; staying invested has been the way to go.
For those with a long-term investing time horizon like Buffett, stay invested. Buy the market corrections. But don’t overreact to the potential for a market implosion.
Here are some top stock picks I think Warren Buffett would like right now:
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Fool contributor Chris MacDonald has no position in any of the stocks mentioned.