9/7/2016

3PiecesofWarrenBuffettWisdomforanExpensiveStockMarketTheMotleyFool

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3 Pieces of Warren Buffett Wisdom for an

Expensive Stock Market
Whenthemarketisclosetoalltimehighs,thebestinvestorsintheworlddon'tstopbuying.
MatthewFrankel (TMFMathGuy)
Sep4,2016at8:06AM

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3PiecesofWarrenBuffettWisdomforanExpensiveStockMarketTheMotleyFool

IMAGESOURCE:THEMOTLEYFOOL.

Thestockmarketishoveringjustbelowrecordhighs,soit'sonlynaturalforinvestorstowonderifit'sstillagoodtimetobuy
stocks,orifallofthegoodopportunitieshavepassed.However,byapplyingsometimetestedinvestmentwisdomfromthe
greatestinvestorofalltime,youcansetyourselfupforsuccessnomatterwhichdirectionthemarketheadsnext.
HerearethreelessonsfromBerkshireHathaway(NYSE:BRKA)(NYSE:BRKB)CEOWarrenBuffettthateveryinvestor
shouldrememberwhenthemarketlooksfrothy.
1.Investwithforeverinmind
OnepieceofadviceBuffetthasgivenBerkshireHathaway'sowninvestorscanbeapplieduniversallywhenthemarketseems
expensive.Inhis2014lettertoshareholders,Buffettwrote:"SinceIknowofnowaytoreliablypredictmarketmovements,I
recommendthatyoupurchaseBerkshiresharesonlyifyouexpectthemtoholdthemforatleastfiveyears.Thosewhoseek
shorttermprofitsshouldlookelsewhere."

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3PiecesofWarrenBuffettWisdomforanExpensiveStockMarketTheMotleyFool

Inotherwords,tryingtotimethemarketisalosingbattle.Sure,themajormarketindexesareclosetorecordhighsrightnow,
buttheDowJonescouldcontinuetoskyrocketto20,000justaseasilyasitcouldfallbackto17,000.Wejustdon'tknowwhat
willcomenext.
Becauseofthis,whilethereisnoguaranteeofprofitinthestockmarket,thebestwaytopositionyourselftomakemoneyis
toholdthestocksyoubuyforalongperiodoftime.Iwouldevengosofarastorecommendaminimum10yearinvestment
timeframe.Therehavebeenveryfewinstancesthroughouthistorywheretheoverallstockmarkethasn'tincreasedoverany
given10yearperiod,andtherehavebeenno15yearperiodsinwhichtheoverallmarkethasdeclined.

^DJIDATABYYCHARTS.

Inshort,themostsurefirewaytomakemoneyinthestockmarketistobuyrocksolidcompaniesandholdonthelonger,
thebetter.

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3PiecesofWarrenBuffettWisdomforanExpensiveStockMarketTheMotleyFool

2.Focusongreatbusinessesatfairprices
Quarter
PurchasePrice
Here'soneofmyalltimefavoriteWarrenBuffettquotes:"Itisfarbettertobuyawonderfulbusinessatafairpricethanafair
businessatawonderfulprice."
Thisisespeciallytruewhenthemarketisexpensiveandthebargainbinisallbutempty.Arisingmarkethasneverstopped
Buffettandhisstockpickersfromfindinggoodvaluesinthemarket.Mostnotably,Berkshireboughtasubstantialamountof
Apple(NASDAQ:AAPL)stockinthefirstquarterof2016.Itthenaddedtothatpositioninthesecondquarterafterthestock
dippednearly20%ondecliningrevenueandtepidthirdquarterguidance.Appleisoneoftheworld'smostvaluablebrand
names,ithasadominantpresenceinitscoremarkets,andittradesforjust12.5timesTTMearnings.Berkshire'sstock
pickerslikelyfeltthatApple'slongtermprospectsfaroutweighedtheseshorttermchallenges.
Phillips66(NYSE:PSX)isanotherexampleofastockBerkshirehasbeenloadinguponrecently.Ifyoucompareitwith
otheroilstocks,Phillips66isn'tthecheapest.However,thecompanyhasadiverserevenuestream(somepartsofthe
companyactuallydobetterwithlowoilprices),asolidbalancesheet,greatmanagement,andafairvaluation.
ThepointhereisnotthatyoushouldfollowBerkshireintoAppleorPhillips66.Rather,it'sthatyouwillrarelygowrongby
purchasingstockinarocksolid,industryleadingbusinesswhenitlooksfairly(notcheaply)valued.
3.Buildyourpositionsovertime
Dollarcostaveraging,afavoritepracticeofBuffett'smentorBenjaminGraham,meansinvestingasetdollaramountinthe
sameinvestmentatfixedintervalsovertime.Basically,thisleadsyoutobuymoreshareswhenpricesarelowandfewer
whilepricesarehigh.Buffetthassaidmanytimesthatthebestwayforthemajorityofpeopletoinvestistodollarcost
averageintoalowcostS&P500mutualfund.WhileIpreferbuyingindividualstocks,dollarcostaveragingworksnomatter
whattypeofinvestmentyou'relookingat.
Considerthisbasicexample.Let'ssayyouhave$20,000toinvestinastockyoulike,whichcurrentlytradesfor$100per
share.Insteadofspendingallyouravailablecashonsharesrightnow,youspreaditoutoverayear,purchasing$5,000worth
ofshareseachquarter.Here'showitpansout:
Quarter

PurchasePrice

Q1

$100

Q2

$105

Q3

$80

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Quarter

PurchasePrice

Q4

$85

InQ1,your$5,000wouldhavegottenyou50shares,butinQ3,youwouldhavebagged62sharesforthesameamount,
loweringyouraveragepurchaseprice.Thisisasimplifiedexample,becausedollarcostaveragingtypicallyinvolvesspending
asmalleramountofmoneyonamonthlybasisoveraperiodofyearsordecades.Butthesameprincipleapplies:Through
simplemath,dollarcostaveragingguaranteesyouraveragecostpersharewillbelowerthantheaveragemarketpriceofthe
stockatthetimeswhenyouboughtit.
AsGrahamoncesaid,"Suchapolicywillpayoffultimately,regardlessofwhenitisbegun,providedthatitisadheredto
conscientiouslyandcourageouslyunderallinterveningconditions."Inotherwords,ifthemarketlooksexpensive,youstill
havetomakeyourscheduledinvestment.Thesamegoesforwhenmarketsarecrashing.Toillustratehowthisworks,
seeanotherarticleinwhichIshowhowsomeonewhohadaveragedintoBankofAmericaoverthepast10yearswouldbe
sittingonaprofittoday,eventhoughthestockitselfhasfallenbynearly70%.

BACDATABYYCHARTS.
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3PiecesofWarrenBuffettWisdomforanExpensiveStockMarketTheMotleyFool

Fromalongtermperspective,thestockmarketisstillattractive
Forallofthereasonsmentionedhere,thestockmarketisstillanattractiveplacetoinvest.Sure,thefiresalebargainsof
2008and2009aren'tthereanymore,butfromalongtermperspective,thatdoesn'tmattertoomuch.Sticktoasmartand
consistentinvestmentstrategynomatterwhatthemarketisdoing,andyou'llendupawinnerovertime.
MatthewFrankelownssharesofAppleandBerkshireHathaway(Bshares).TheMotleyFoolownssharesofandrecommendsAppleand
BerkshireHathaway(Bshares).TheMotleyFoolhasthefollowingoptions:longJanuary2018$90callsonAppleandshortJanuary2018$95
callsonApple.TryanyofourFoolishnewsletterservicesfreefor30days.WeFoolsmaynotallholdthesameopinions,butweallbelievethat
consideringadiverserangeofinsightsmakesusbetterinvestors.TheMotleyFoolhasadisclosurepolicy.

AUTHOR

MatthewFrankel
(TMFMathGuy)
MattbroughthisloveofteachingandinvestingtotheFoolinordertohelppeopleinvestbetter.Mattspecializesinwritingaboutthebestopportunitiesinbankstocks,real
estate,andpersonalfinance,butlovesanyinvestmentattherightprice.FollowmeonTwittertokeepupwithallofthebestfinancialcoverage!

ARTICLEINFO

Sep4,2016at8:06AM
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