Here's what Warren Buffett's latest investment tells us about the propriety of investing in the stock market while it sits at record highs.
Warren Buffett-led Berkshire Hathaway purchased about $234 million worth of RH shares earlier this month, making a rare acquisition amid one of the strongest stock market rallies in recent history.
With high profile investors forecasting that the Dow Jones Industrial Average could surge as high as 30,000 within the near future, Berkshire’s recent deal could indicate that the investment firm does not intend simply to sit out as the markets soar.
In early November, CNBC reported that it had been almost four years since Warren Buffett’s last major acquisition, despite the strong performance of Berkshire-backed companies.
As Berkshire’s businesses continued to succeed in generating cash, analysts remained puzzled about Buffett’s reluctance to go on a spending spree.
The $532 billion investment firm has likely not found many deals to its liking. Berkshire targets companies that are undervalued by the market and expected to scale. RH seems to be the first “undervalued” firm it has found in quite some time.
Due to the relatively small size of the deal in comparison to Berkshire’s previous investments, David Kass, University of Maryland’s Robert H. Smith School of Business finance professor, told Bloomberg that executives other than Buffett and Charlie Munger most likely led the deal.
Maybe they saw a certain growth opportunity here that other analysts are missing. Much of their investment career is to try to find those rare under-priced opportunities where they expect to outperform the market.
However, that doesn’t mean it’s any less notable than if Buffett had pulled the trigger himself.
The rapid recovery of the Dow Jones in the past six months is what likely has created a difficult environment for Berkshire to make big deals in, as businesses tend to get overvalued during a bull market.
The sustained trade deal optimism also presents investors with significant downside risk. According to some analysts, the market has already priced in a trade deal. A breakdown in talks could ignite a rapid sell-off.
However, the RH deal – whether executed by Warren Buffett or his deputies – shows that while the stock market as a whole may be getting ahead of itself, that doesn’t mean value investors have to sit around and wait for the next crash.
This article was edited by Josiah Wilmoth.
Last modified: January 30, 2020 9:21 PM UTC