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Tags: Buffett | stocks | rally | overvalued

Buffett: Stocks are Reasonably Priced

By    |   Wednesday, 20 November 2013 01:27 PM

Stocks are "in a zone of reasonableness," neither overpriced nor underpriced, billionaire investor Warren Buffett told CBS.

His comments coincide with the Dow Jones industrial average reaching 16,000 for the first time and many experts asserting that stocks are in a bubble.

"I would say that they're in a zone of reasonableness," Buffet told CBS while at his former grade school in Omaha, Neb., for American Education Week. "Five years ago, I wrote an article for The New York Times that said they were very cheap. And every now and then, you can see that they're very overpriced or very underpriced. Most of the time, they're in an area where maybe they're a little high, a little low, and nobody really knows exactly. They're definitely not way overpriced. They're definitely not underpriced."

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Although many investors worry about a stock market correction, Buffett takes the long-term view.

"We look at owning stocks as owning parts of business, just like owning a farm or an apartment house," he told CBS. "And if you buy the right farm or apartment house or the right business through a stock, and you don't try and guess whether it's going to go up next week or next month, but you hold it for five or 10 or 20 years, you're going to do very well."

Other experts, pointing to valuation metrics, agree that stocks are not in a bubble.

Liz Ann Sonders, chief investment strategist at Charles Schwab, listed three metrics that show stocks are not overvalued, according to The Wall Street Journal.

The S&P 500's rolling 10-year average of annual market returns remains below its long-term average.

"Investors don’t spend a lot of time hanging around the median line, but instead the market tends to trend in one direction for multi decades (well-overshooting the mean) before heading back down to well-undershoot the mean," she states. "Being less than five years into the upcycle, history suggests we have more room to run."

The S&P 500's price-to-earnings ratio, both trailing and forward P/E ratio, is still below the average of previous peaks.

The longer the rally lasts, the more likely stocks will become overvalued and ripe for a downturn, she cautions.

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Stocks are in a zone of reasonableness, neither overpriced nor underpriced, billionaire investor Warren Buffett told CBS.
Wednesday, 20 November 2013 01:27 PM
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