I’m taking Warren Buffett’s advice as markets hit record highs

August is often thought of as a quiet time in the stock market. That has not been obvious this month, with both the FTSE 100 and US S&P 500 indices hitting new all-time highs. That has put me in mind of some famous words of billionaire investor Warren Buffett.

As Buffett puts it: “Be fearful when others are greedy and greedy when others are fearful”. With stock markets on fire and some investors looking increasingly greedy, is now the time to be fearful?

What’s Buffett doing?

I think it may be. So I reckon, does Buffett. In fairness we do not know exactly what the ‘Sage of Omaha’ is thinking. But his behaviour can offer us some clues.

Buffett’s company Berkshire Hathaway has continued to sell down a large part of its biggest shareholding, Apple, turning huge paper profits into hard, cold cash.

In the most recently reported quarter, Berkshire’s cash position hit an all-time high of $344bn.

Those data points make me think Buffett might be looking around at some of the greed in the current market and behaving somewhat fearfully.

Putting theory into practice

Sitting on a pile of a few thousands pounds of spare cash is more likely to be the case for a private investor than a spare $344bn! But I think there are still lessons to be learnt from Buffett’s aphorism as markets hit new highs.

Sitting on cash while markets soar can feel like missing out on opportunities. But a different way to look at it is waiting prepared for future opportunities when markets crash, as sooner or later they do at some point in the economic cycle.

Buffett does not simply sit twiddling his thumbs when not investing. Each day he spends hours reading about companies, scouring the market for potential long-term investment ideas.

One share on my watchlist

I have been doing the same. We know from Berkshire’s ownership of companies like Precision Castparts that Buffett sees the commercial appeal of a well-run engineering company with specialist expertise, proprietary products and a long-term customer base.

So do I, which is one reason I like the look of FTSE 100 engineer Spirax Group (LSE: SPX). It is not a household name, understandably given its business-to-business focus. But a company cannot raise its dividend annually for 55 years – as Spirax has done – without getting a lot of things right, for a long time.

The problem for me is one of price. Spirax shares sell for 33 times earnings per share.

That is too pricey for my tastes. I am fearful of risks such as ongoing weak industrial demand in China eating further into Spirax’s profitability.

But if markets cool and Spirax’s share price falls to what I see as an attractive level, I will be happy to add it to my portfolio.

I am fearful of overpaying in today’s record-beating markets. Like Buffett, I am spending time hunting for brilliant shares I would like to buy if I could do so at an attractive price.

The post I’m taking Warren Buffett’s advice as markets hit record highs appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple and Spirax Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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