I’d hate to say I told you so, but Warren Buffett isn’t quite so shy. For his entire career, Buffett has been counselling investors against buying into “bubble” stocks like the ones that rose and fell last week. In the span of just a few weeks, stocks like AMC, Gamestop, and Nokia (HE:NOKIA) rose dramatically, only to come tumbling down to earth. Gamestop was the star of the show, reaching a high closing price around $350 before tumbling down below $70.
Many investors lost money in the “meme stock” crash. Reddit’s WallStreetBets forum, which had previously been full of hype and excitement, was by Friday replete with stories of investors who claimed they had lost it all — with screenshots of their account balances to prove it. It was a brutal sight to behold. And the sad part is, it could have been avoided if investors just followed Warren Buffett.
Buffett avoids the pain Unlike meme stock investors, Warren Buffett had a great week last week. In the same week that meme stocks fell, Berkshire Hathaway (NYSE:BRKa) rose 2.74% — one of its best weeks all year. Berkshire did not have any meme stocks in its own portfolio, which mostly consists of wholly owned companies and blue-chip equities. Given that the S&P 500 rallied last week, we can assume that the underlying Berkshire portfolio performed all right as well.
Invest in what Buffett recommends instead If you’re watching the meme stock saga unfold, you might be a little reticent to invest. Some of those stocks came crashing down hard. If you’d invested $10,000 in GameStop (NYSE:GME) at its peak and sold at $70, you’d have realized a $8,000 loss. Ouch.
But that’s no reason to stay away from the markets. Meme stocks aren’t representative of stocks as a whole, which had a pretty good week last week. The S&P 500, for example, rose 4% from Monday’s close to Friday’s close. And some individual stocks did even better than that.
Generally, Warren Buffett recommends that individual investors buy index funds. Such funds are highly diversified, reducing the risk in the investment. They also have very low fees. Over time, funds like the iShares S&P TSX 60 Index Fund deliver returns guaranteed to be about “average” for the index they track. They are among the best investments you can buy as an amateur investor.
If you’re feeling a little more adventurous, you could consider investing in stocks that Warren Buffett himself invests in. Buffett has never specifically recommended that investors do this, but it stands to reason that if he owns a stock, he thinks it’s good.
Consider Suncor Energy (TSX:SU)(NYSE:SU), for example. This is a classic “value” stock of the type that Warren Buffett has built his fortune on over the years. With a 0.93 price-to-book ratio, the stock trades for less than the value of the underlying assets, net of debt. In other words, when you buy Suncor, you’re technically getting more than what you’re paying for.
Of course, the stock is cheap for a reason. Suncor Energy lost money in every single quarter of 2020, with the first-quarter loss coming in at a whopping $3.5 billion. However, funds from operations (FFO) were positive for all of those quarters, and operating cash flow was positive for most of them. Yes, Suncor’s 2020 losses look scary. But cash flow metrics tell a different story. When you buy Suncor, you’re buying into a cash flow positive enterprise trading for less than the net value of its assets. This is the kind of stock that Buffett likes to invest in. And he puts his money where his mouth is: as of right now, he owns 19 million shares of SU.
The post Warren Buffett: Told You So! appeared first on The Motley Fool Canada.
Fool contributor Andrew Button owns shares of iSHARES SP TSX 60 INDEX FUND. David Gardner owns shares of GameStop. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends BlackBerry and recommends the following options: short March 2021 $225 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and long January 2023 $200 calls on Berkshire Hathaway (B shares).
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