Buffett Says It's Time to "Be Greedy"
By Jim Mueller
October 1, 2008
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"I will tell you how to become rich. ... Be fearful when others are greedy. Be
greedy when others are fearful." -- Warren Buffett
Even in today's market situation, investors should be paying attention to those
words.
What makes his quote more a propos today is the following bit of information.
An August New York Times article pointed out that bearish sentiment, as
measured by the Conference Board, had hit an all-time high. Fully 55% of the
people questioned in July expect the stock market to decline over the next 12
months.
Why is this important today? Because each time bearish sentiment has exceeded
35% over the last 21 years, the market has confounded that sentiment by gaining
ground over the following year, at an average pace of 20.5%.
Month
Bearish Sentiment (% of People Questioned)
Following 12-Month Rise in S&P 500 Index
Nov 1987
39%
19%
Oct 1990
48%
29%
Dec 1991
36%
4%
Apr 1994
36%
14%
Oct 1998
36%
24%
Mar 2003
47%
33%
Jul 2008
55%
??
Source: The New York Times
I love pessimism
Of course past performance is no guarantee of future returns, but take another
look at that quote above. And then read this one, also from Warren Buffett,
from his 1990 letter to shareholders:
The most common cause of low prices is pessimism -- some times pervasive,
some times specific to a company or industry. We want to do business in such an
environment, not because we like pessimism but because we like the prices it
produces. It's optimism that is the enemy of the rational buyer.
Were you one of those who checked the table above when I told you the date of
that quote? The man knows what he's talking about.
As an example, in October 1990, just as bearish sentiment was peaking at 48%,
he revealed that he had upped his position in Wells Fargo to just shy of 10% of
the company. In the following 12 months, while the market returned a "mere"
29%, that one investment returned 123%. In the five years following that
bearish peak, it returned 290% or 31.3% average per year! And that doesn't even
include the dividends. He still owns about 8.8% of the company.
Here's a more recent example
The last time bearish sentiment peaked, in the spring of 2003, it reached 47%.
However, if you had been greedy instead of fearful, you could have picked up
shares in the following fairly prominent, well-capitalized companies and gotten
some outstanding returns.
Company
Market Cap, 3/31/03
Debt-to-Equity, 12/31/02
Price Change, 3/31/03-3/31/08
American Eagle Outfitters (NYSE: AEO)
$1.0 billion
3.6%
262%
Garmin (Nasdaq: GRMN)
$3.9 billion
3.3%
202%
Kinross Gold (NYSE: KGC)
$1.9 billion
13.7%
153%
Monsanto (NYSE: MON)
$4.3 billion
24%
1,260%
Source: Capital IQ, a division of Standard & Poor's.
What is Warren doing today?
Now with bearish sentiment again sky high, Buffett has been greedy this year.
Not only has he increased his position in food giant Kraft Foods (NYSE: KFT),
but he's expanded his position as US Bancorp's (NYSE: USB) largest shareholder.
And, of course, he recently made a sizeable investment in Goldman Sachs (NYSE:
GS).
Will those work out for him? Given his record, probably. But the question
you've got to ask yourself today isn't "What is Warren doing?" Rather, it's "Am
I going to be greedy?"
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I hope you'll answer "yes" to that question.
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This article was first published Aug. 26, 2008. It has been updated.
