The current bull market has created many winners for ASX investors with shares in top companies such as Afterpay Touch Group Ltd (ASX: APT), Appen Ltd (ASX: APX) and WiseTech Global Ltd (ASX: WTC) up 380%, 226% and 167% respectively over the last year.
WiseTech shares have gone up so high they are now trading at 77 times forward earnings for FY 2019 and so it is a natural question to ask, is the share market over valued?
Fortutnately, legendary investor Warren Buffett was asked that same question in this CNBC interview. Here are my takeaways from Buffett’s response:
It’s not that precise
Its very difficult, even for the world’s greatest investor, to say with certainty whether the market is over or under valued. Based on traditional measures such as PE ratios, the market looks more expensive than it has previously been. Buffett however makes a good point in saying that even at today’s prices, shares look like they will offer a better long term return than the alternative (cash, bonds, real estate and commodities).
Instead of worrying too much about the market’s valuation, Buffett has been consistently buying shares in all market conditions. This quote from the interview is a gem, “We’re buying stocks this morning, and I’d rather buy them cheaper, but I’ve been buying stocks since March 11 1942 and I’ve bought them under every President”.
Focus on quality
Buffett talked about looking for capital light businesses that can earn high rates of return on reinvested earnings. These are high quality businesses that can compound and build wealth over time.
Think long term
Despite being 88 years old, Buffett has maintained his long term approach and I think this can be a key competitive advantage for retail investors such as you and me in an age where algorithmic trading and index investing are rising.
The best make it look simple
None of these concepts are complex or new to most investors and yet Buffett stands out with his near flawless execution. His wealth may make him an outlier but his methods can be replicated by the average Joe. If you consistently buy quality businesses over time and have enough cash on the side for a rainy day, history suggests that it won’t matter too much whether today’s market is over or under valued.
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You can find Kevin on Twitter @KevinGandiya. The Motley Fool Australia owns shares of AFTERPAY T FPO, Appen Ltd, and WiseTech Global. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.