Is the Warren Buffet Way Right? - Money and Investing with Andrew Baxter

-

As the world’s most famous investor and arguably. One of the most successful investors of all time. The Warren Buffet Way has stood the test of time – or has it? Here is our take on the Warren Buffet Way and why it may not work in every modern-day market situation:

Warren Buffet 

Unless you’ve been living under a rock for the last 50 years. It’s pretty hard to not have heard of Warren Buffet. As one of the world’s most famous and successful investors of all time. Warren Buffet founded a fund called Berkshire Hathaway in the late 50’s. And Warren Buffet’s mode of operation since inception has been nothing shy of grand. As rather than buying 100 shares in a given company for his fund. He typically might purchase 5,10, even 15% of a company he buys into – as an example. The guy owns over 5% of Apple. Over the years, Berkshire Hathaway has generated billions of dollars in profit for their investors says host Andrew Baxter. However more recently over the last 10-15 years hasn’t quite performed to the standard it once did.  

Stock Valuation and the Warren Buffet Way

Warren Buffet is most famous for the book he wrote on stock valuation which is the ‘Warren Buffet Way’. And Warren use as ‘Price to Earn’ (PE) ratios to value stocks. And pick future out performer for his Berkshire Hathaway fund to invest in. The challenge he face since the dotcom boom particularly pertains to stock earnings. As with tech stocks, traditional valuation methods like the PE ratio are tough to apply. Also, given those stocks trade at such a high premium for the earn they could generate down the line. Not the earnings they have already generated.

The Stock Market is Overvalued 

One of the more recent developments of Buffet has been the valuation of the stock market relative to economic GDP. As a new method of valuation. Regardly, Buffet has taken the market capitalization of the stock market and divided that by annual GDP output to work out the effective PE ratio of the entire market. Relative to the performance of the economy. And what he found was staggering – the stock market is trading at a premium of around 243%. Also, which based on historical measures is about 95% overvalued. Under normal conditions, any savvy investor would be gearing up for a market correction. To come back to some level of sensibility. However, we aren’t in normal conditions. And really the main driver of this has been the super-hot performance of the giga-cap tech stocks.

Why Buffet has Underperformed

It really is no surprise when we say that the hottest race in town of the last 5-10 years of the stock market has been in the technology sector. As host Andrew Baxter says, the valuation tools for tech stocks are extremely different to the traditional tools given their earnings are ‘forecasted’ down the line. For example, if we take a look at some examples – Tesla is trading at around 392x their earnings and Afterpay 171x just to name a few. If you’re Warren Buffet, you aren’t touching these stocks with a stick. As they are so massively overvalue by any traditional stretch of the imagination.

This is hence why Berkshire Hathaway has perform the stock market for the last 15 years – a lack of exposure to these forward looking. High growth technology stocks. These stocks have become such a dominant component of our market. However, is not something Buffet tends to consider. Is he wrong for this? Or does he know something we don’t?

Advice for Retail Investors

As a new retail investor, navigating these bizarre market conditions can be a little challenging. Yes, there has been an insatiable amount of growth out of the tech sector recently, however, when some of these shooting stars come back to earth – those value investors, like Buffet, will have made the right call. As host Andrew Baxter suggests, these disruptive tech companies have done an amazing job at shaking up the make-up of their niche and gaining quick market share. Nonetheless, these giga-cap stocks overvalue and so must buy with caution.

So, Is Buffet wrong by not having exposure to these kinds of businesses? Our answer is a hard no. There is a reason that Warren Buffet is the most successful investor of all time, thus, if you’re looking to enter markets the advice is to simply just ensure you’ve got a spread of companies in your portfolio. Having the traditional Buffet businesses in your portfolio is just as important as having some exposure to tech stocks – to learn more, reach out to Australian Investment Education.

 

Comments

Post a Comment

Popular posts from this blog

Navigating the Debt Ceiling: Andrew Baxter’s Call for Principled Leadership

-
Image
  In the midst of complex economic discussions and political wrangling, one voice emerges with clarity and conviction: Andrew Baxter. In his recent insights into the intricacies of the debt ceiling debate, Baxter sheds light on the delicate dance that policymakers must perform to ensure economic stability. Raising the debt ceiling is not merely a matter of bureaucratic procedure; it is a fundamental aspect of fiscal responsibility and governance. As lawmakers grapple with this pivotal issue, Baxter emphasizes the need for principled leadership, bipartisan cooperation, and a steadfast commitment to responsible governance. At the heart of Baxter’s message is the call to rise above partisan divides. In a time when political polarization threatens to undermine progress, Baxter advocates for a unified approach to addressing economic challenges. By transcending political differences and embracing fiscal prudence, policymakers can navigate the complexities of the d...
Read more

Income Investing and Dividend Strategies – Andrew Baxter

-
In the world of investing, income investing and dividend strategies have gained significant attention and popularity among investors seeking to generate consistent returns and build wealth over the long term. These approaches focus on capitalizing on the power of cash flow generated by investments, particularly through dividends, to create a steady stream of income. In this article, we will delve into the concept of income investing, explore dividend strategies, and discuss their benefits and considerations. Income investing revolves around the idea of generating a regular income from investments, such as stocks, bonds, real estate investment trusts (REITs), and dividend-paying funds. The primary objective is to seek out assets that offer reliable and attractive cash flow, allowing investors to supplement their income or accumulate wealth over time. One of the key components of income investing is dividends. Dividends are a distribution of a company’s profits to it...
Read more

Five Things You Probably Didn’t Know About The Stock Market

-
The stock market is a massive puzzle that is changing every day. Nobody knows everything about the stock market, however we have a few things for you that you may not know. Join us this week as we dive into 5 things you may not know about the stock market: Money is Never Lost in the Market For many who have seen their accounts become smaller and smaller over time, this one may be tough to believe. The truth is however, money never simply disappears on the stock market, it merely changes hands. Host Andrew Baxter points out that where there are buyers, there are sellers meaning there is always someone else on the opposite side of any trade you take. What is happening is merely a transfer of ownership between people who have different opinions on where the price is going to go where someone is wrong and someone is right. The majority tend to find themselves on the losing side with a small percentage of people occupying the winning side. When frustrated with the stock marke...
Read more