Fear of missing out (FOMO) is a dangerous thing in the share world. No share is a buy at any price, meaning you should be careful about elevated prices.
When share prices go up and up and up you think it's too late and you've missed out on that great opportunity.
Altium Limited (ASX: ALU) seemingly has a great future due to technology, automation and AI so why not jump in at a share price of $27? REA Group Limited (ASX: REA) could become a dominant force in the real estate sale process resulting in it commanding a higher percentage of the fees over time – so why not buy its shares at $90? Ramsay Health Care Limited (ASX: RHC) has great ageing tailwinds, so $80 shouldn't be too much to pay right?
I've cherry picked three examples, but all of them have dropped significantly since their all-time highs. It's dangerous to focus on non-valuation aspects of a business without also considering the valuation.
The point I'm making is that if a share price gets too frothy then it will very likely come back down, at least temporarily, until the earnings catch up.
Share prices generally move up and down much faster than earnings. People get overly excited or cautious about businesses. This is both an opportunity and a warning. It can be an opportunity to buy at the low point and sell at the high point. But, be careful of buying at the high point.
But, it's important to be patient if shares do get too high. Higher interest rates and bond rates are likely to send many businesses to more sane valuations. If interest rates had stayed low then many of these valuations would probably be okay, but that's not the case any more.
Foolish takeaway
As Warren Buffett likes to say – investing isn't like baseball where you must swing at every opportunity. You can simply wait on the sidelines watching a company until it starts to trade at a more attractive value.
Altium and REA Group are definitely better value than they were a couple of months ago.
