Avid followers on investing legend Warren Buffett will be familiar with his saying that:
"You pay a very high price in the stock market for a cheery consensus"
Buffett's point is that 'investing with the herd' can be a very dangerous pursuit!
Many investors are much more comfortable buying shares which are popular, doing well and which everyone seems to rate as a buy.
This scenario can ultimately be a major source of long-term portfolio underperformance. This occurs because rarely is an undervalued stock (let alone a bargain) to be found amongst the most sought after, popular and widely bought companies.
Shares in CSL Limited (ASX: CSL) and Ramsay Health Care Limited (ASX: RHC) are both trading near their all-time highs and on trailing price-to-earnings multiples of 27x and 34x respectively.
Despite both companies being high quality businesses with superb track records and positive future outlooks, in my view, Buffett probably wouldn't be a buyer of either CSL or Ramsay at these levels.
In fact, he hasn't even been a buyer of these two companies at lower levels (to the best of our knowledge) despite every possibility that he is familiar with the financial details of these global operators.
In respect of CSL, I'd be guessing that Buffett would consider CSL outside his "circle of competence". Despite the impressive track record of this world-class biotech, Buffett would probably view the future market dynamics for CSL (I'm talking time frames of 10, 20 and 30 years) as too difficult to accurately estimate. This means he would consider it too difficult to accurately estimate CSL's future earnings stream and hence its value.
With regards to Ramsay, the dependable nature of the group's earnings base would no doubt appeal to Buffett, however while he happily pays up for quality, he has rarely been comfortable purchasing stocks at very high multiples. He prefers to base his investment case on current maintainable earnings rather than future expectations. That likely rules out Ramsay Health Care.
