The Motley Fool

Warren Buffett: Don’t Believe the Stock Market Gains

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Warren Buffett said, “Be fearful when others are greedy and greedy when others are fearful.” His wisdom is always relevant, but this quote is relevant now more than ever. That’s Buffett’s statement against following the market trend, joining the sell-off frenzy, and basically giving in to the herd mentality. And if we follow his advice, we shouldn’t be very optimistic and believe in the recent market gains.

The S&P/TSX Composite Index is currently seeing its sharpest up-take in the last six months. The index is up 7.6% since the end of October. Many underlying sectors are performing very well; people are hopeful and are buying — so it might be better to be fearful right now. These current stock market gains might just be a temporary surge, fueled in part by the success of the upcoming vaccine’s trials.

What should prudent investors do?

If you want to follow Buffett’s advice, you might want to do the opposite of what the masses are doing. Many investors might have started buying stocks left and right, because they believe that the market is finally recovering, and they won’t see low valuations like these anytime soon. This optimism can temporarily prop up the prices, which is excellent if you want to exit a position with fewer losses but that’s not suitable for buying.

Even if another market crash is not coming, you might not want to buy stocks when everyone else is acting greedy. Once the balloon of optimism is punctured by the sharp edge of reality (i.e., a weak underlying economy), the stocks might normalize again, and you can buy when they are falling, not when they are getting overvalued.

What to buy?

Lightspeed (TSX:LSPD)(NYSE:LSPD) is truly following in the footsteps of Shopify, at least in terms of stock movement. Its stock also spiked recently, along with the rest of the market, and surged 27% in merely three days. It’s hard to tell how long the current bout will continue, but right now, it’s too overpriced to consider. You might want to wait for the market and the tech sector to calm down a bit, so you can buy Lightspeed at a modest valuation.

The stock is currently too strong to come down to a fair valuation anytime soon. A full-blown market crash or some serious internal problems in the company might bring the stock down to a decent price tag, and if that happens, it might pay off to go greedy for Lightspeed. After this year’s market crash, the stock has grown over 300%.

If you had bought into the company when it hit rock bottom, you would have grown your capital at a magnificent rate. Your $10,000 in the company would now be equivalent to $42,300 in a matter of eight months.

Foolish takeaway

Warren Buffett’s advice is usually trustworthy, and if he is not joining the buying frenzy, there might be a lesson in it for all investors. The chances of another market crash happening are still high, and when that happens, you’d be glad you didn’t join believe in the recent market gains. You can start looking into stocks you may want to buy when the market drops again.

Speaking of Warren Buffett...

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Fool contributor Adam Othman owns shares of Shopify. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify. The Motley Fool owns shares of Lightspeed POS Inc.

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