Some believe that a new bull market is right around the corner. Others think a recession is on the way that could pull the stock market down. It seems as if the only thing that's certain is that there's a lot of uncertainty.
If you're an investor, this dynamic might cause you to throw up your hands in frustration. But you could also try to gain perspective from someone who has successfully navigated times like these multiple times through the years. Where should you invest right now? Here's Warren Buffett's advice.
Image source: The Motley Fool.
Don't try to predict the market
Buffett explained in his most recent letter to Berkshire Hathaway (BRK.A -0.45%) (BRK.B -0.28%) shareholders exactly what he and his longtime business partner Charlie Munger think about predicting the market. He wrote that he and Munger "firmly believe that near-term economic and market forecasts are worse than useless."
If two of the greatest investors of all time know they can't predict what the market will do over the near term, it's a good bet that you can't either. The reality is that no one can.
Does this mean that you're back to throwing your hands in the air? Not at all. While it's impossible to know what the market will do over the coming weeks and months, you can be quite confident that the stock market will rise over the coming years and decades.
Focus on the underlying business
Buffett noted in his recent letter that he and Munger "are not stock-pickers." Instead, they're "business-pickers." He made the same point in his letter to Berkshire shareholders last year.
If you were able to personally ask the legendary investor for advice, he would likely recommend that you take the same approach. Focus on the underlying business. If the business performs well, the stock usually will follow.
What kinds of businesses does Buffett like? He explained in his latest letter to Berkshire shareholders that the goal is to invest "in businesses with both long-lasting favorable economic characteristics and trustworthy managers." In the past, he has used similar language, stating that he and Munger seek to invest in businesses with "durable economic advantages and a first-class CEO."
Focus on valuation
There are plenty of strong businesses with excellent top executives that Buffett doesn't invest in, though. Why not? Buffett remains a value investor at heart. He would almost certainly tell you to focus on valuation before buying any stock.
Buffett noted in his recent shareholder letter that it's sometimes possible to "buy pieces of wonderful businesses at wonderful prices." However, he added that stocks also "often trade at truly foolish prices."
The challenge, however, is figuring out whether or not a business is available at a wonderful price (or at least at a fair price.) Buffett explained the valuation process that he and Munger use in his 2013 letter to Berkshire shareholders. His first step is to estimate a company's earnings range for at least five years in the future. He then determines if the stock trades at a reasonable price relative to the lower end of the estimated earnings.
These steps are easier said than done. Buffett mentioned, though, that investors who don't want to put in the work to estimate earnings have a good alternative. Instead of buying individual stocks, they can invest in low-cost S&P 500 index funds.
What Buffett is buying
So how is Buffett applying these lessons in his own investing these days? He only bought four stocks in the fourth quarter of 2022: Apple, Louisiana-Pacific, Occidental Petroleum, and Paramount Global. The legendary investor no doubt thoroughly researched the underlying businesses and valuations of each of these stocks before he made any moves.
You don't have to buy the same stocks that Buffett buys for Berkshire Hathaway's portfolio to follow his investing advice, though. Tune out the stock market's noise. Focus on the same criteria that he does with any stock you're considering.
By the way, it's OK to make mistakes. Buffett acknowledged that he's made plenty through the years. But, as he wrote to Berkshire shareholders, "Over time, it takes just a few winners to work wonders."
