Be Greedy When Others Are Fearful


Stock market routs are miserable events. They sow widespread financial pain and suffering … along with a heaping dose of anxiety.

Source: Shutterstock

These steep downdrafts bring pleasure to almost no one, except for a maybe a few random short sellers who are reaping the rewards of betting against the market. But for the rest of us, there is no “Joy in Mudville” — no smiles when the stock market strikes out and loses, big time.

That said, stock market selloffs are the extreme events that create opportunity. They produce the panic selling and “washouts” that usually offer great moments to make savvy long-term investments.

“I will tell you how to become rich,” Warren Buffett famously remarked. “Be fearful when others are greedy. Be greedy when others are fearful.”

The sage advice seems so obvious when you read it in black and white. Yet it seems almost impossible to implement in the real world. That’s because when others are fearful, we usually are, too.

Most of us do not possess some magical immunity against the fear of losing money or suffering large stock market losses. No, most of us are terrified, just like everyone else … and for good reason.

As bad as the stock market has been during the last few weeks, it could become even worse. The current 24% year-to-date drop on the Dow Jones Industrial Average could become 35% or — heaven forbid — 50%, like it did during the 2008-09 selloff.

No one knows. Therefore, I don’t believe it’s worth spending much time trying to know.

Using Weakness to Establish New Positions

I recommend using the current weakness to establish new positions or add to existing ones. But I do not suggest throwing caution to the wind and making all your purchases at once. Instead, design a plan to purchase a specific selection of stocks over the span of a few weeks.

I would repeat what I suggested two weeks ago, when the coronavirus from China first started rattling the stock market:

Initially, many of these purchases could produce poor results, if the market continues its downward spiral.

But if you are purchasing the shares of dominant companies at today’s discounted prices, you will probably be patting yourself on the back one year from now.

In other words, when buying into a hyper-volatile market, you often feel quite stupid at the outset. But over time, that “stupidity” starts looking a lot like genius.

For example, as I pointed out in my previous alert, investors who purchased stocks during the SARS virus outbreak in 2003 would have endured some initial mark-to-market losses, as global markets continued sliding lower.

But those March 2003 lows turned out to be great buying opportunities.

Source: Chart by InvestorPlace

As the above chart shows, all the major stock markets were much higher on Feb. 10, 2004 than they were on Feb. 10, 2003 — the day the SARS virus first made headlines.

And within four years after the SARS outbreak, the S&P 500 had doubled, the MSCI EAFE Index of international stocks had tripled, and the Shanghai Composite had quadrupled.

Source: Chart by InvestorPlace

The Stock Market Will Recover

To be sure, today’s selloff is more severe than the 2003 downturn. But it is definitely not worse than the 2008-09 debacle, which sent the major market averages tumbling more than 50% before reaching a bear-market low.

Even in that episode, as bad as it was, investors who sprinkled “buy” orders into the market throughout that downturn would have fared well over the next few years.

Yes, these hypothetical investors would have suffered some deep mark-to-market losses on their initial investments. But despite that “bad start,” the stock market ultimately rewarded the investors who “bought when others were fearful.”

In fact, Warren Buffett was among those intrepid investors. He made investments in various emerging market securities and bank stocks during the rout phase of 2008.

Almost immediately, those investments were underwater … deep underwater.

But Buffett ultimately booked billions in profits on these trades.

I would not dare to minimize the risks of investing in the current market volatility. To the contrary, I respect its power to destroy capital by falling much lower than it already has.

But history tells us that moments like these are what buying opportunities are made of. So if you have the stomach for it, do a bit of buying over the next few weeks … while others are fearful.


Eric Fry

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Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends … before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south. Eric does not own the aforementioned securities.

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