One Warren Buffett investing tip to remember in this market

Taking cues from Warren Buffett, Pearson (LON: PSON) stock is a contrarian pick that I like after suffering a sharp dip following a revision to its outlook.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

This past weekend, fellow Fool contributor Manika Premsingh discussed some important investing lessons from Warren Buffett. Today I want to focus on another gem from the investing guru.

The FTSE 100 has been pummelled over the last three months as Brexit negotiations have failed to yield an acceptable resolution so far. The European Union and the UK have agreed to a January 31 2020 Brexit extension and the increase in investor anxiety over Brexit brings me to one of my favourite Warren Buffet gems.

Be greedy when others are fearful

One of Warren Buffet’s most repeated quotes is “Be fearful when others are greedy. Be greedy when others are fearful.” Buffett is a strong advocate of value investing, a philosophy first popularised by British-born investor Benjamin Graham. Value investing is an investment strategy that aims to pick stocks that are trading for less than their intrinsic or book value.

The cycle of greed and fear is one that plays out over and over. Investors often allow emotions to dictate their buy/sell decisions, which can lead to losses in the long term. So, what is the best way to follow this advice? First, we need to do our homework. That means identifying stocks that are undervalued. When the broader market is in flux, that makes the job a little bit easier.

In order to follow this tip, investors also need to learn to control their emotions. This sounds simple, but it can be very difficult. There is a wealth of information available to investors in the present day, but this can also be a curse as the herd instinct can take hold.

A stock I’m targeting with this tip in mind

Pearson (LSE: PSON) is a stock that has been hit in September and October. The shares have dropped 24.7% year-on-year as of late morning trading on October 28. In September, the FTSE 100-listed company downgraded its guidance and said that it now expects adjusted operating profit to be at the bottom of its £590m-£640m guidance range.

This is primarily due to weaker US higher education business. US students are shifting to materials that can be procured at a lower cost or for free. Higher education courseware in the US is now forecast to decline between 8% and 12% in 2019. However, Pearson still expects group revenue to stabilise this year.

Pearson should be tempting for investors who are on the hunt for a potential turnaround stock. Right now, the stock possesses a price-to-earnings ratio of 11.7 while also offering up a 2.8% dividend yield. The Relative Strength Index (RSI) is a momentum indicator that can be useful when I’m on the hunt for value. It is designed to chart the current and historical strength or weakness of a stock or market based on the closing price of a recent trading period. After its adjusted guidance, Pearson stock has fallen below an RSI of 30, and it remains at this level at the time of writing. This means the stock is in technically oversold territory and I think that can be considered a Buy signal.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ambrose has no position in any of the shares mentioned. The Motley Fool UK has recommended Pearson. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »