When it comes to investing, there is perhaps no one better than Warren Buffett. It is no wonder that when he speaks, the investing world listens.
This year, Warren Buffett gave a two-hour interview to CNBC after the release of the 2019 Berkshire Hathaway shareholder letter. Here are three useful insights he provided during the interview.
On whether the market is expensive
One of the highlights of the interview was Buffett’s answer to what every investor wants to know: Is the market expensive?
In his response, Buffett said that it all comes down to interest rates. Interest rates determine the “risk-free” rate and will, in the end, determine whether stock market prices are cheap relative to this risk-free rate.
He said, “If you tell me that 3% long bonds will prevail over the next 30 years, stocks are incredibly cheap … and if there were a way to short 30-year bonds and own the S&P for 30 years, I would give you enormous odds that the S&P is going to beat 30-year bonds.”
Long answer short, Buffett believes that at current rates, stocks will easily beat bonds over the next 30 years and, therefore, believes that the stock market is not expensive based on current interest rates.
He also added:
“Now, we’ve had this period of extended long-term low rates not only here but around the world. And now, it looks like we’re not going to jack them up very fast. So, we may be in a new world, the world that Japan entered back in 1990. And if so, stocks will, when we look back on it, will look very cheap.”
On making investment decisions
Buffett also answered a question regarding how he reacts to bad news about one of his investments.
He said, “Yeah, the stock market is there not to instruct me. It’s there to serve me. So [if there is] bad news and the stock, goes down, the question is (whether) the long-term valuation changed?”
Investors should by no means react hastily to bad news about a stock and sell it immediately. Instead, take a step back to assess the situation. Don’t let the stock price influence your decision.
He also added, “So what you like is bad news about a fundamentally good business.”
If there is bad news about a fundamentally good business that caused a stock to decline temporarily, it could be a great time to add more shares to your portfolio.
On investing in the stock index
Warren Buffett has said numerous times that most retail investors would be better off investing in a low-cost index rather than in actively managed funds. He reiterated his position in 2019, saying that he has instructed his widow’s trustee to put 90% in an S&P 500 index fund and 10% in government bonds.
Low-cost index funds track index returns and have historically averaged around 9% per year. That’s a decent return — one that has outpaced most actively managed funds.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia owns Berkshire Hathaway Inc Class B shares. The Motley Fool Singapore has a recommendation for Berkshire Hathaway.