The Oracle’s Top Two Rules for Investing
Warren Buffett, aka The Oracle of Omaha, famously issued two rules for successful investing. Rule one: Don’t lose any money. Rule two: Don’t forget the first rule.
I closely adhere to those rules myself. Below, I’ll steer you toward an opportunity that offers both growth and value, even under today’s difficult conditions, but without the undue risk of losing money.
U.S stocks closed mixed on Monday. The major indices performed as follows: the Dow Jones Industrial Average +0.08%; the S&P 500 -0.39%; the NASDAQ -1.20%; and the Russell 2000 -0.52%.
However, crude oil prices soared Monday, sending energy stocks past $113 per barrel, amid continuing signs that the latest COVID variant is easing in China (see chart).
Optimism about China is becoming more pervasive. In pre-market futures contracts Tuesday, the main U.S. indices were trading sharply higher. European and Asian shares have been rebounding as well.
China’s zero-tolerance pandemic lockdowns in major industrial centers had been a drag on economic growth, but the latest public health statistics are encouraging. The world’s second-largest economy is ramping up again.
Starting June 1, Shanghai authorities plan to initiate a broad reopening, with increases in domestic flights. Shanghai is a manufacturing and financial hub for China and also the country’s most populous city.
Not only would China’s easing of restrictions add to global growth, it also would alleviate supply chain woes and stoke energy demand. That’s good news for the already thriving energy patch.
The benchmark SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has generated a year-to-date total return of 34.17%, compared to -17.13% for the SPDR S&P 500 ETF Trust (SPY), as of market close May 16. Energy has been the best performing sector this year.
Still, the overall market has produced the worst start to a year since 1932, and stocks remain within a whisker of a bear market.
Corporate earnings are among the few bright spots. To date, more than 90% of S&P 500 companies have reported operating results for the second quarter, with most of them beating expectations. For Q1 2022, the blended earnings growth rate for the S&P 500 is 9.1%, according to research firm FactSet.
Analysts are projecting record-high earnings per share for the S&P 500 of $229.22 for calendar year (CY) 2022 and $251.22 for CY 2023.
A silver lining of the recent stock slump: valuations have retreated from their excessive highs. As of this writing, the forward 12-month price-to-earnings (P/E) ratio for the S&P 500 is 19.4. On January 3, 2022, the S&P 500 closed at a record high value of 4796.56, with a forward P/E of 21.4.
Last Friday’s surge in stocks suggests that perhaps the market has bottomed and it’s poised for a reversal. Indeed, on Tuesday, stocks were poised for a strong open.
Bargain buyers need to be wary, though, because the pain might continue longer. Stick to companies selling at a steep discount that have a clear strategy for stabilizing or improving their fundamentals. That’s because cheap stocks can turn into value traps, if earnings or margins keep deteriorating.
We haven’t seen market “capitulation” just yet. Capitulation is a Wall Street term for investors simply giving up on trying to regain lost returns. Contrarians take this phase as a sign that the market has bottomed; it means only buyers are left. We’re not there yet.
Good Value Hunting…
However, if you’re a value hunter, I have good news. Our investment team has just uncovered the first “Apple” of the electric vehicle industry. One unusual company is secretly siphoning the EV industry’s trillion-dollar profits into investor accounts over and over again, like clockwork.
Tech disruptors like this stock offer growth but also downside protection, because they’re plugged into a megatrend that’s unstoppable, regardless of the market’s temporary gyrations.
If your portfolio is heavily weighted toward the Silicon Valley “story stocks” touted on CNBC, you should pocket at least partial gains and transition to smaller value plays in the tech sector that get less attention.
Now’s the time to buy this under-valued stock, before the investment herd catches on and bids its shares sky high. Click here for details.
John Persinos is the editorial director of Investing Daily.