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February 07, 2011 at 05:42 AM
“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.”
–Warren Buffett
These are exciting times for investors, and that excitement is reflected in the price of stocks. The Dow is now trading above 12,000, having just reached its highest level since June 2008.
A lot of very smart investors and traders strongly believe that the uptrend will continue. Indeed, the Wall Street consensus expects 2011 will be another rewarding year for stocks.
But if, like Warren Buffett, you view excitement as an enemy and greed as a reason for fear, then the two and a half years of climbing prices should give you some pause. And if, like Buffett, you view expenses as an enemy, then you should have a fondness for both value stocks and ETFs of course.
One reason why the stock market has been on such a tear since 2008 is that interest rates are so low. Given the low valuations of stocks in 2008, the gap between earnings on stocks and returns on guaranteed investments was, and perhaps remains, quite high.
But Buffett acolytes and value-oriented investors would certainly feel more comfortable buying bargains, which give investors greater downside protection when the next correction occurs.
There are many ways to measure value; doubtless, Warren Buffett has more sophisticated ways at his disposal. For our purposes, I am using P/E ratios as a generally accepted (very loose) measure of value. (Note that different ETF providers may calculate the fund’s average P/E differently.)
