"If there's a game it's very good to be in for the rest of your life, the idea to stay out of it because you think you know when to enter it—is a terrible mistake. I don't know anybody that can time markets over the years." Warren Buffett, CNBC interview
Investors often find it difficult to purchase shares in a business when that stock has already enjoyed a strong rally. Many find it easier to simply add it to their stock watch-list, and buy shares in a business that has fallen in price instead in the hope that it will rebound.
The same can be said for the market in general. When the share market has rallied – as has the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) since early November last year – investors can fall into the trap of assuming all stocks have become overly expensive, and avoid buying anything as a result.
But the truth is, the ASX 200's rally of late has largely been driven by a small handful of shares. In particular, the banks and the miners. Consider some of these gains since the market hit its low on 9 November:
- The Commonwealth Bank of Australia (ASX: CBA) share price has rallied 14.5%
- The National Australia Bank Ltd. (ASX: NAB) share price has climbed 21.9%
- The Westpac Banking Corp (ASX: WBC) share price is up 11.5%
- The Australia and New Zealand Banking Group (ASX: ANZ) has lifted 15.2%
- The Fortescue Metals Group Limited (ASX: FMG) share price has jumped 18.3%
- The Rio Tinto Limited (ASX: RIO) share price has risen 12.3%
The ASX 200 is heavily weighted towards the banks and the miners. As such, it is no surprise the market as a whole has performed so well off the back of those gains. But by no means does that make everything expensive.
In a recent interview with investing legend Warren Buffett, CNBC's Becky Quick posted the question:
"[The market being at such high levels] has a lot of doubters and a lot of people saying: "Wait, it's too late for me to get in. I've missed it. [The Dow Jones is past 20,000 points], now I have to wait for the pullback." What would you say to someone like that?"
Warren Buffett's response was simple. To paraphrase, he suggested that investing is a life-long journey – one that will see many ups and downs. But trying to time those ups and downs is extraordinarily difficult to do, particularly on a consistent basis. He noted:
"If you were buying a farm and you decided that farms were gonna be worth more money ten, or 20, or 30 years from now and that would be a productive asset, go out and buy it unless it was just … some absurd price. And the best thing with stocks actually is to buy 'em consistently over time. You wanna spread the risk as far as the specific companies you're in by owning a diversified group, and you diversify over time by buying this month, next month, the year after, the year after, the year after. I … but you … making a terrible mistake if you stay out of a game that you think is going to be very good over time because you think you can pick a better time to enter it."
To add another layer of confidence for any investors who are still left wondering if stocks are too expensive, Buffett exclaimed "we are not in a bubble territory or anything of the sort."
If interest rates were much higher than they are today – say, around 7% or 8% — then Buffett could see potential for a bubble. After all, investors could receive higher returns by simply holding cash in the bank rather than risking it in shares, which would ordinarily impact share prices.
But interest rates remain low. In Australia, for instance, the current cash rate stands at just 1.5%. Even if the Reserve Bank of Australia does lift interest rates at some point in the next couple of years, it seems very likely they will remain low for some time yet.
Foolish Takeaway
I'm not suggesting you go out and buy anything and everything, and Buffett certainly wouldn't do that either. But standing on the sidelines now and waiting for that next crash to buy your next stock could be a very costly mistake if the market chooses to rally instead.
