Be Greedy When Others Are Fearful
Warren Buffett has many lessons for life but one of my favorite ones is this:
“Be fearful when others are greedy and greedy when others are fearful.” - Warren Buffet
An old-school saying that two primary emotions drive the market: fear and greed. You have to admit, the stock market in 2022 has been rocky. There’s been ups and there’s been downs. Constantly toying with our emotions. As of Oct 2022, the Total Stock Market is down 18% and the S&P 500 is down 20% from the same time last year. These rough waters test the resolve of even the most hardened investors.
None of us have a magic ball and we don’t know what the future holds for 2023 and beyond. However, if Warren Buffet is correct in his statement, it is during these fearful times that we must stay the course and continue to invest.
1 - Down Market Is Normal, And To Be Expected
We should actually expect down markets as a normal part of the economic cycle. Morgan Housel, the author of The Psychology of Money says in his book:
“The correct lesson to learn from surprises is that the world is surprising.” - Morgan Housel
There is no way anyone could have guessed that COVID-19 would have hit us like it did. That Russia was going to invade Ukraine in early 2022. Or inflation was going to hit double digit numbers. However, just like surprises aren’t new. Down markets aren’t new and should actually be expected. When we just keep winding the clock back and we are hit with so called surprises after surprises that in essence “crashed the market.’
The Global financial crisis of 2008.
The 9/11 terrorist attack in 2001.
The tech crash of the late 1990s.
The Black Monday of 1987.
The massive inflation of the late 1970s and early 1980s. We think a 6% mortgage rate is high? Try 20%.
We could keep going, but you see the trend here. The specific trigger is impossible to predict, but what is consistent throughout history is that dips and crashes in the market are to be expected. The news makes it sound like the The Federal Reserve increasing its rate is shocking news. But it's not. They’ve done it many times in the past and they will continue to do it in the future as a tool to manage the economy.
The war in Ukraine is tragic. But conflicts are not new. Supply chain problems have always existed. It's just more exacerbated due to certain specific triggers. For some reason we are all surprised when these types of events happen, but if we are students of history, it really shouldn’t be. The mass media has conditioned us to make us think that these are significant events that we should be surprised by. But, they are incentivized to sell news, so who can blame them?
The main idea behind “be greedy when others are fearful” is that we should invest consistently no matter what the market or the news is doing. That is how we win in the long run. So know what rocky markets are normal. And know that market fears are normal. If you are greedy, like me, stay the course and stay invested.
2 - Volatility Makes Money
Volatility is a double edged sword. People fear it because it can lead to losses in the short term. However, it is how the stock market produces high expected returns that it does because it also presents opportunities for gains. Let's say that you fear volatility so you pull your money out whenever the stock bottoms out. In those cases you are actually missing out on the rebound when stocks have their best performance.
According to a JP Morgan study, In the past 20 years, if you stayed fully invested riding out all the ups and downs of the market, your annualized return would be around 9.4%. However if you were to have missed just 10 best days in the last 20 years, your annualized returns drop to 5.21%. More than 4% in returns. Now how about if you missed the 20 best days? Your return drops to 2.51%. And 30 days? Effectively no returns at 0.32%.
Source: JP Morgan Wealth Management, The case for (always) staying invested, February 18, 2022.
Like life, good days happen because there are contrasting bad days. These days with the best returns happen because we have contrasting bear markets. And you can only take advantage of these best trading days if you are doing these two things; one, buying consistently, and two, staying invested.
If the stock market did not have bear markets, it would have bond-like returns. Flat with minimal ups and downs. If you want no risk in your portfolio, you would essentially invest all your money in Treasury bonds. Which are assumed to never default and you will get the interest rate you were promised at maturity. But long-term Treasury bonds only offer 3-4% return while the stock market has had long-term returns much higher than that.
Of course, no one wants to see their investments go down in value. But we must remember that stock prices are not a reflection of the value of the underlying company, but rather a reflection of investor sentiment at any given moment. If you take no risk, the financial markets will not reward you with higher expected returns. If you want to make money in the market in the long run, embrace volatility. They are your friends, not the enemy.
3 - No Perfect Time
When it comes to winning with investment, the key is not to focus on timing the market, rather the time in the market. In an annual letter to Berkshire Hathaway shareholders, Buffett once said that the only value of stock forecasters is to make fortune tellers look good. Smart investors like yourself know that it is impossible to predict a stock’s future outcome.
However, this doesn’t stop millions from trying. Like Las Vegas, the hope of ‘hitting big’ attracts millions and even tens of millions to the market to try their luck with the stock market. But the trouble with trying to time the market is that getting it right once isn’t enough to win in the market. You have to win twice. Once you sell, you also have to decide when to get back in.
Let’s say after you sell at this rough market and the stock market rises. In this case you are losing money, or more precisely, missing out on the stock market gains. You can choose to give up and cut your losses, buying back into the market at a higher level than you sold it. Or you could let it ride hoping that the market eventually will reverse itself and you are assured of your decision to sell. This could happen, or it could not.
But let’s say your prediction was correct and the stock market falls after you sell. But now what? You now have to decide when to take your money and buy back in. When you do, how do you know if you are buying back at low. Or just buying back in the middle instead of the end of the bear market?
The bottom line is that to succeed at market timing, it's not good enough being right once. You have to be right twice. When you sell and also when you buy. I know of many people who tried to call the end of the bull markets. Unfortunately, these people almost all certainly left stock market gains on the table by trying to time the market. Instead of trying to time the market, we should focus on time in the market through regular consistent contributions.
4 - Our Long-Term Memory Sucks
30 years old from now when we are all rich, retired and relaxing in our private Italian villas, we won’t remember when we invested our money. Because frankly, it won’t matter. If you are investing for the long run, you will forget whether you invested now, 3 months from now or even a year from now. Just take a look at a chart of the S&P 500 in the last 100 years.
S&P 500: 1928-Present
I can almost guarantee that most investors who invested 30 years ago don't really care in retrospect today whether they invested Mar 15, 2019 5:04 pm or Mar 16, 2020 10:10 am. With time, it all washes out when the market trend is up.
If the total market is trading at $10,000 per share in 2050, would you care if you invested with the market at $118 or $120 per share? Your investment grew and that made you financially independent regardless.
When we are investing for the long run, the specific timing of when we invest our money becomes less and less important. Continually buy when people are fearful and also buy when people are greedy. 30 years from now when we are sipping our vintage wine in our Italian lakeside cottage, we can all have a good laugh about this little blip in history. Until then, stay in the market and keep buying.
5 - Simple Path To Wealth
We can literally spend an entire day analyzing the market and individual funds. There are millions of people who actually do this. You don’t have to look far to see them. Just jump on any reddit threads related to day trading and you’d be surprised how many people love talking about this stuff; Trying to interpret stock charts. Predict direction of future changes. Creating complicated valuation spreadsheets.
It may sound appealing to some, but for me, despite how much I love learning about personal finance, the economy and investing, I have absolutely no desire to do this. And this is because I know that all this extra analysis will lead to no better and often worse returns than if I did nothing.
Sure, are there people who can beat the index consistently? I’m sure there are. But in the history of investing only a handful of investors have been able to modestly beat it over time. But that is exactly why Warren Buffett, John Templeton and Peter Lynch are household names. Our names aren’t. So my strategy is to have a simple investing plan where I tune out the financial news and invest my money at regular intervals independent of recent stock market moves.
It’s not like I don’t read financial news. Because I admit the Wall Street journal is one of my favorite newspapers and I find the many articles fascinating. However it's primarily for education and entertainment purposes. The beauty of just investing consistently is that this enables me to spend less time worrying about the stock market and more time with my family, leisure activities, and other cool activities like creating blog posts like this.
Warren Buffet famously encouraged investors to buy during the depths of the 2008 financial crisis with the following quote.
“Be fearful when others are greedy and greedy when others are fearful.” - Warren Buffet
While this quote can encourage some to time the market, for smart investors like you and I, it should help us get over the fear of investing consistently in a bear market. Market is choppy right now. But that is a good thing because rough waters means many are fearful. Be greedy and invest.
