Avid followers of investing legend Warren Buffett will know that one of his many brilliant quotes is:
"You pay a very high price in the stock market for a cheery consensus."
Buffett's point is that 'investing with the herd' can be a dangerous pursuit!
For many investors it's more comforting to buy stocks which are popular with their peers, that are doing well and which everyone seems to be in agreement are a good idea to buy. This scenario can ultimately be a major source of portfolio underperformance. This occurs because rarely is an undervalued stock (let alone a bargain) to be found amongst the most widely liked companies.
Case in Point
- Commonwealth Bank of Australia (ASX: CBA) reached a fresh new record intra-day high of $96.60 on Friday.
- CSL Limited (ASX: CSL) also hit a fresh new high of $96.60 on Friday as well.
There is plenty of market chatter at the moment about which of these two stocks will be the first to hit the 'triple-digit' mark. It's understandable that it's a point of conversation, however, what investors should be focusing on is the value of these two stocks, not the price.
In my view, Buffett wouldn't be a buyer of either CBA or CSL at these levels. In fact, he hasn't even been a buyer of them at lower levels despite every possibility that he is familiar with the financial details of both of these companies, particularly CBA.
For one, it is widely known that Australian banks are amongst the most expensive in the world, Buffett can invest anywhere so he would be unlikely to choose the most expensive region to begin with and certainly he'd be unlikely to buy a bank stock which sells so far above book value.
Meanwhile, I'd guess Buffett would consider CSL outside his "circle of competence". Despite the impressive track record and solid earnings base of this world class biotech, Buffett would probably view the future market dynamics for CSL (I'm talking time frames of 10, 20 and 30 years) as too difficult to evaluate accurately, and therefore too difficult to put a value on the future earnings stream from CSL.