“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.” ~Warren Buffett
Billionaire investor Warren Buffett added shares of companies during the market downturn. He has been acquiring stocks on the dip during the recent quarter’s market downturn and bulking up his stakes in oil companies such as Occidental Petroleum (OXY)
Buying a ‘Wonderful Company at a Fair Price’
The most important concept to appreciate when buying stocks is that price is what you pay for a stock, and value is what you get. Paying too high a price can decimate returns and increase your investing risk.
To delve deeper, the value of a stock is relative to the number of earnings or cash flow the company will generate over its lifetime. In particular, this value is determined by discounting all future cash flows back to a present value, or intrinsic value.
Buffett has said that “it is much better to buy a wonderful business at a good price than a good business at a wonderful price”.
Buffett’s investing style has been buying stocks on sale priced below its intrinsic value. He has never been one that favors acquiring commodities, but higher inflation rates could have played a role, Thomas Hayes, chairman of Great Hill Capital in New York, commented.
“As for Buffett buying shares in OXY, I wouldn’t make too much on it,” Hayes said. “Historically, he has avoided investing in commodity stocks. Today he sees it as a hedge against inflation and a potential supply/demand imbalance.”
Inflation is the biggest strain on the economy. While the pace of inflation eased slightly during the month of April, investor sentiment towards the Fed’s pace of tightening remains mixed.
The fact that he is deploying his war chest of cash is a strong indication that he and his lieutenants believe that there are undervalued stocks out there,” he said. “This doesn’t mean he believes that the market is undervalued or will rebound in the near future, but that some companies are compelling buys. This is a good signal for value investors.”
Buffett’s energy investments demonstrate the 91-year old’s investing strategy of acquiring shares in companies that have low valuations and shareholder returns in the form of dividends and buybacks, Art Hogan, chief market strategist B Riley Financial, told TheStreet.
References: