Buffett Says It's Time to "Be Greedy"

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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, and the following bit of information only makes his quote more apropos.

A New York Times article from August 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 expected the stock market to decline over the next 12 months. Fast-forward to a repeat of that question in October, and not much had changed.

Why is this important today? Because each time bearish sentiment has exceeded 35% over the past 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
November 1987	39%	19%
October 1990	48%	29%
December 1991	36%	4%
April 1994	36%	14%
October 1998	36%	24%
March 2003	47%	33%
July 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.

You demand proof? In October 1990, just as bearish sentiment was peaking at 48%, Buffett 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% on average per year! And that doesn't even include the dividends. He still owns about 7.8% 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, March 31, 2003	Debt to equity, Dec. 31, 2002	Price change, March 31, 2003  - March 31, 2008
Coach (NYSE: COH)	$3.44 billion	13.7%	215%
Leucadia National (NYSE: LUK)	$1.98 billion	21.6%	280%
Monsanto (NYSE: MON)	$4.29 billion	24.0%	1,260%
SanDisk (Nasdaq: SNDK)	$1.17 billion	23.9%	168%
Fluor (NYSE: FLR)	$2.73 billion	2.0%	319%

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. Not only has he increased his position in integrated oil giant ConocoPhilips, he has also recently expanded his position in utility NRG Energy (NYSE: NRG). And, he's opened a position in electrical equipment maker Eaton (NYSE: ETN)

Will those work out for him? Given his record, probably. However, the question you've got to ask yourself today isn't "What is Warren doing?"

Rather, it's "Am I going to be greedy?"

Need help?
I hope you'll answer "yes" to that question.

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This article was originally published on Aug. 26, 2008, under the headline “Why Now Is a Good Time to ‘Be Greedy.’” It has been updated.

Jim Mueller usually isn't greedy, but this fall has been an exception. At the time of publication, he did not own shares of any company mentioned. Coach is a recommendation of Stock Advisor. The Fool's disclosure policy is all about clarity.