The Motley Fool

Warren Buffett: This Could Be the Best TSX Investment Strategy for 2021

Image source: Getty Images

Warren Buffett has been one of the most successful investors in the world. His investment philosophy is no secret, as he mainly prefers buying businesses that are undervalued. Unlike most other novice traders, Buffett never tries to make a quick buck by trading in risky assets for the short term.

Warren Buffett’s wisdom

While new investors may find themselves attracted to the recent massive Bitcoin gains, Buffett doesn’t find any value in cryptocurrencies. He has already publicly stated that he will never own Bitcoin or any other cryptocurrency.

His critics may point towards a recent big rally in Bitcoin to prove him wrong, but making money like Buffett from the market — consistently for decades — isn’t easy. That’s why if you wish to grow your money by investing in stocks and retire richer, you might want to learn from the 90-year-old investing legend.

You don’t have to fear a technical correction

Last month, Buffett pointed out how small businesses “have become collateral damage in a war” against the pandemic. He noted that the coronavirus-related shutdowns hit many of such small businesses very hard. You might look at the recent stock market rally and deny that anything is wrong with the present business environment. However, if we continue ignoring small businesses’ troubles, it could lead to a short-term stock market correction.

To put it into perspective, many small businesses serve large organizations as their suppliers or service providers. Without fixing the issues many small businesses are currently facing, they might not survive for long — indirectly affecting large businesses. This could trigger a chain reaction, leading to more unemployment and an overall economic downturn.

Time to learn from Buffett’s experience

Buffett usually avoids taking unnecessary risks, and he almost always avoids unnecessary market noise. Doing so ensures his long-term investment decisions are not affected by short-term market corrections.

When Buffett finds most stocks trading with incredibly high valuations, he tries to adjust his open positions. His investment firm Berkshire Hathaway decided to exit the airline industry. Seemingly, Buffett foresaw the risk the airline companies might face for years after the COVID period. But he continues to stay invested in many companies with large moats. Such businesses tend to be well established and can swiftly swim through tough economic periods.

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) could be two such great TSX stocks. While both of these banks ended 2020 on a mixed note, I find their stocks attractive this year. Let’s discuss why.

TSX companies with a moat

Despite the pandemic headwinds, TD Bank’s net interest income rose to $6.4 billion in the Q4 of fiscal 2020 from $6.2 billion a year ago. It allowed the bank to beat analysts’ consensus earnings estimates in the last couple of quarters. After facing a negative quarterly earnings trend for a couple of quarters, TD Bank’s adjusted earnings rose on a YoY (year-over-year) basis in the last quarter.

While its fiscal 2020 earnings fell by 20%, analysts expect double-digit positive growth in its fiscal 2021 earnings.

Canadian Imperial Bank of Commerce’s fiscal 2020 earnings fell by about 19%. Nonetheless, its 2021 earnings are estimated to showcase 10% gains. Just like TD Bank, CIBC also has been reporting better-than-expected earnings in the last couple of quarters. While its net interest income remained nearly unchanged in the last quarter, its interest expenses fell sharply in the October 2020 quarter to $1 billion from $2.5 billion a year ago.

These two banks’ strong balance sheet allows them to reward their investors with handsome dividends even during difficult times. TD Bank currently has a 4.3% dividend yield, while CIBC offers a little higher 5.3% annual dividend yield.

Bottom line

If you invest your hard-earned money for the long term in the shares of well-established businesses like TD Bank and CIBC, it could help you remain largely unaffected in nearly all market circumstances like Buffett. Also, their annual dividends could ensure that you keep getting some passive income each year.

Looking for great UNDERVALUED TSX STOCKS? Here’s a FREE LIST for you:

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: short March 2021 $225 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and long January 2023 $200 calls on Berkshire Hathaway (B shares). Fool contributor Jitendra Parashar has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.