"Be fearful when others are greedy and be greedy only when others are fearful."
So said Berkshire Hathaway chair Warren Buffett in one of his most-quoted aphorisms. It's one I've been pondering as I consider my financial goals.
As a relatively new investor, I want my money to help me achieve things. A dream of mine is to own my own home, so investing in the right fund, or picking the right stocks, will help me get there more quickly.
Buffett's wisdom begs the following question, however: when is it really the right time to make a bet on a stock? And is buying cheap always the best way forward?
What Does Morningstar Say About Buying Stocks?
Alex Morozov, director of equity research Europe at Morningstar, tells me buying cheap stocks depends on an investor's preferences and the risks they can accept.
"It's hard to paint everyone with the same blank statement that everyone should invest in cheap stocks," he says.
"You look at folks depending on where they are in the investment cycle. Are they close to retirement? Are they in the accumulation stage? Are they in a mature stage of their investment?"
Morozov feels that when Morningstar's analysts label a stock as cheap, they have already reviewed the specific reason and thoroughly assessed [a rating's] impact on the stock itself.
"We tend to steer folks more into quality at an attractive price rather than [encouraging] the blanket statement buy everything cheap," he says.
"Quality companies tend to generate higher returns almost by definition because they are high-quality companies. They can reinvest those returns at much higher rates. They have that opportunity because of the structural barriers that their industries exhibit."
He adds that these are the companies investors should look to because they can compound wealth at higher rates than companies with no or narrow economic moats.
What is 'Buying The Dip' and Should I do it?
I also posed the question of whether investors should prioritise buying cheap stocks to Tineke Frikke, fund manager of the Morningstar Silver-Rated Waverton UK Equity Fund.
In her view the question I asked was the wrong one. What investors focus on is not the present but the future.
"I am going to adjust your question a little bit," she says.
"What we find interesting is not the valuation now, but what it looks like in two years' time. What we are often finding is market pricing is efficient in the now and balances all the good and bad things.
"It is less efficient if you look outwards [into the future]. For investors who can afford to be patient, companies look cheap further out."
She also argues that, generally speaking, cheap companies can have issues like debt, or perhaps the spectre of a declining core industry or sector. Companies that consistently deliver and keep growing normally stay expensive.
"For those kinds of companies, we sort of wait for the market to just sell of, and they might become a little bit more attractive," she says.
"But generally, we tend to be a little bit in the middle. If a company is priced roughly in line with what it has been valued at for the last five years, that is not unreasonable.
"If it's a lot lower, we ask 'why?' And if it's a lot higher, we must ponder whether that is justified and if something has changed."
And so to Buffett's famous adage about being greedy when the market is fearful, a practice also known as "buying the dip." Recently investors awoke to a painful fall in US technology stocks after an accumulation of factors – including worse-than-expected US jobs data and a Bank of Japan decision to hike interest rates – spooked markets. That was a good time to buy, Frikke says.
"When the whole market hurts, that is the time to buy companies you really like," she says.
"But is it the time to bet on companies that may not survive? Probably not. If everyone loves a stock, that is not the time to buy it. So, when the market is worried, that's when you look for good companies."
Key Lesson: Risk Costs Money
Another way of looking at this is to acknowledge that risk costs money. Zehrid Osmani, head of Martin Currie's global long-term unconstrained investment team and manager of the Martin Currie Global Portfolio Trust, says precisely this.
"There is always an equation that you must assess around risk versus reward on any stock," he says.
"It is about assessing how much of the risk that a company is facing is captured in the share price," he tells me.
This can only be assessed on a case-by-case level, lest a blanket approach dominate. "At the stock level, you have to have done your homework in terms of what you are looking to purchase as a business and what stage it is at in terms of its life cycle," he says.
So, where do I go from here? I've learned that just buying cheap stocks is not necessarily the best way to invest – nor is buying expensive stocks for a feeling of safety in the crowd.
Rather, it's important to assess a company's quality, its long-term prospects, and the risks investors hopes will not be fulfilled.
One way to get a quick handle on that is to look at our regularly-updated list of the UK's most-shorted stocks, which shows investors the fund managers who are betting against specific companies' share prices. But you can also use Morningstar's own data and analytics.
And to end where I began, with Buffett, who once said: "I buy on the assumption that they could close the market the next day and not reopen it for five years."
It's the quality companies that will do well in that scenario.
