In the long run, staying away from the stock market is not advisable, but it doesn't mean that buying stocks will make you money, nor does long-term holding.
As we enter 2024, the first thing investors should do is not rush to buy stocks, but should press the pause button, there is a famous investment Buffett is worth all investors to pay attention to and practice.
Buffett's investment advice: Don't buy any stocks in 2024 unless you pass this very straightforward test.
The Buffett Test
In his 2014 letter to shareholders of $Berkshire Hathaway(BRK.B)$ $Berkshire Hathaway(BRK.A)$ , Buffett explained the test that he and his business partner Charlie Munger have always implemented before buying a stock.
The Buffett Test has two steps:
Determine if you can "reasonably estimate the earning range for the next five years or even longer."
The stock price is reasonably priced at the lower end of the estimated earning range.
You might be thinking, doesn't Buffett ever "break the rules" and buy a stock that passes this test even if the economic outlook is uncertain or Wall Street doesn't like it?
The answer is yes. Buffett has said nearly a decade ago that in the 54 years he has worked with Charlie Munger, they have never abandoned a good buying opportunity due to macro or political factors or other people's opinions. In fact, these factors never enter their consideration when making decisions.
Easier said than done
Although Buffett's buying test is simple and straightforward, it's easier said than done, especially when it comes to estimating a company's earnings for the next five years or longer.
Even Buffett and Munger, as value investors, often find it impossible to estimate future earnings. When this happens, the solution is simple: move on to the next stock.
In addition, even after buying a stock, Buffett and Munger sometimes make mistakes and buy stocks that turn out to be wrong. To minimize such mistakes, it's important to stay within their "circle of competence." As ordinary investors, we should only invest in stocks from industries we are familiar with because this will allow us to more accurately estimate future earnings.
Two stocks passed the Buffett Test
The first one is $D.R. Horton(DHI)$, which Buffett established in 2023. Even though the stock soared 70% last year, its dynamic P/E ratio is still only 11.4.
Considering that there is still a severe housing shortage in the United States and the Fed has signaled that it will cut interest rates in 2024, D.R. Horton's earnings are expected to grow steadily in the next few years.
$Meta Platforms, Inc.(META)$ is another stock that doesn't appear on Buffett's list of holdings, nor is it within his circle of competence, but Wall Street believes that this technology stock may pass the Buffett Test.
Based on analysts' expectations for earnings growth over the next five years, Meta currently has a PEG ratio of just 0.79. A PEG ratio below 1.0 is considered low valuation.
A silver lining for lazy investors
Every investor who wants to buy stocks in 2024 should follow Buffett's two-step test. But if you're too lazy to estimate profits, there's a very easy alternative: simply buy a low-cost $S&P 500(.SPX)$ index fund. Buffett even predicts that investors who follow this advice will almost certainly do well in the long run.
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