Be fearful when others are greedy, and greedy when others are fearful.
It’s hard to argue with that statement when it comes from no less than the Oracle of Omaha himself, and one of the most successful investors of all time. Warren Buffett is the sixth-richest person in the world, worth more than $90 billion.
Dave Gilbert here, Editor of Smart Money, and if there is one thing we’ve seen in the market this year, it is fear.
Unless you are a Zen master, you have surely felt that fear many times in the last nine months. So has every other investor.
- Should I sell? What if I miss a bounce? Or what if my stocks keep going down?
- Should I buy? What if the stocks I buy lost another 20% and I could have gotten them at a better price?
- Or should I stay on the sidelines? When do I get back in? Which bounce is the real turn, and which is a bear market rally only to be followed by another shot down?
Warren Buffet’s one-sentence investing philosophy may be simple to understand and 100% percent true. But it is NOT easy to execute.
Nonetheless, the evidence is clear that the seeds of big future profits are planted in markets exactly like this one…
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More Tricks Than Treats This Year
There are ways to measure the amount of fear in the market, and they confirm what a scary year this has been.
Perhaps the best known is the Volatility Index, known as “the VIX” because that is its symbol. As you would expect, when fear is high, investors sell. When fear is low, investors buy.
The VIX it has spent much of 2022 at some of its highest levels in 10 years, except for the massive and rapid spike in March 2020 when the pandemic was spreading like wildfire.
We can also look at investor sentiment as measured by the American Association of Individual Investors, which conducts a weekly survey. The most recent survey from last Thursday showed pessimism above its historical average 45 of the last 46 weeks and at “unusually high” levels for 30 of the last 38 weeks.
If you’ve felt the fear this year, you have lots of company. You don’t want to see your current stocks or new investments go down further, but you don’t want to miss great opportunities either.
The key, it seems, is a balance of those two. Eric Fry focus on megatrends, value, and long-term potential, so he knows this is the time to take advantage of opportunities, but it is also the time to hold on to a little bit of caution.
Here was Eric’s advice back in the panic of March 2020, and it rings just as true today…
Not surprisingly, fear is the emotion du jour. In fact, you could say that fear is in a bull market…
At times like these, it’s helpful to remember that financial markets are cyclical creatures. They cycle through bull markets and bear… through episodes of greed and fear.
Whenever either one of these sentiments reaches an extreme among the investing public, the stock market typically reverses course and heads in the opposite direction.
In other words, investors tend to become extremely bullish at major stock market peaks, just before a selloff begins. Conversely, investors tend to become extremely bearish at major stock market bottoms, just before a new upswing begins.
These patterns have repeated themselves over and over again throughout the history of market booms and busts… That’s why so many of the greatest investors throughout history pushed themselves to invest during the stock market’s darkest hours.
These investors understood, correctly, that crisis creates opportunity – the opportunity to achieve extreme investment success that accumulates wealth.
BUT IT IS NOT EASY. IT IS HARD.
The kind of success folks like Warren Buffett and Sir John Templeton achieved often began by looking like failure. That’s because the earliest buys into a terrible market usually move lower first, before moving higher.
With this essential thought in the forefront of our minds, I continue to recommend sifting through the carnage to establish new positions in select stocks, bit-by-bit. I recommend buying into this market, knowing that the reward may not be immediate. In fact, the path toward success may seem a lot like trudging across Death Valley to find a case full of gold on the other side.
There’s a dose of realism for you, but it is hopeful realism. After that rough stretch in 2020, the market went on to new all-time highs. Chances are pretty much 100% it will again… because it always has.
One other note: After providing that realistic perspective – and mentioning the important caveat that success might not be immediate – Eric recommended three stocks that day. As fate would have it, the stocks moved quickly. By January of this year, Ivanhoe Mines Ltd. (IVPAF) had chalked up gains of 353%, Karora Resources Inc. (KRRG) had gained 256%, and he closed out Galaxy Resources Ltd. (GALXF) for a gain of 428%.
Balancing Risk and Reward
Putting money into a down market is difficult. It goes against human nature to go toward risk rather than run from it.
Anyone who has lived in snowy climates has been taught to turn their car “into the slide” when losing control on a slippery road. Your instinct is to turn the other way, but that’s the wrong move.
Here’s Eric again…
We should not take that risk lightly, but neither should we let it chase us out of the market completely. Instead, I recommend pursuing a disciplined, long-term strategy that is panic-resistant.
One of the best ways to reduce risk is… to embrace it… selectively.
In other words, the best defense is a solid offense, which means focusing on the best risks, while saying “no” to all the others.
I have been pursuing that exact strategy, just as I have done throughout my career… and I expect this strategy to deliver outsized rewards over the coming months and years.
Deciding which stocks to invest in is obviously critical. Eric recommends concentrating most of your investments in “megatrend” opportunities – like the global need for more and cleaner energy, next-generation 5G wireless technology, electric vehicles and the batteries needed to power them, and many more.
These are the trends he follows and the investment recommendations he makes in his Fry’s Investment Report service.
Eric and Warren Buffett would also tell you to not make price the most important factor when deciding which companies to own. Almost every stock out there is cheaper than it was at the beginning of this year, so you don’t need to focus on extremely beaten down stocks.
As Buffett also says, It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
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On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.