Buffett Says It's Time to "Be Greedy"

"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, investors should pay attention to those words. The following bit of information only makes Buffett's quote more apropos.

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 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 the 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. Then read this one, also from 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% average per year! And that doesn't even include the dividends. He still owns about 7% 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, millions

Debt-to-equity, 12/31/02

Price change, 3/31/03-3/31/08

Charles Schwab (Nasdaq: SCHW  )

$9,765

28.0%

160.8%

General Dynamics (NYSE: GD  )

$11,980

28.3%

202.8%

Hewlett-Packard (NYSE: HPQ  )

$47,466

25.3%

193.6%

Nike (NYSE: NKE  )

$13,598

26.4%

164.5%

NVIDIA (Nasdaq: NVDA  )

$2,031

33.3%

360.9%

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 integrated oil giant ConocoPhillips (NYSE: COP  ) , but he's also upped his position in health-benefits manager WellPoint (NYSE: WLP  ) .

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.

Fool 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. NVIDIA and Schwab are Motley Fool Stock Advisor recommendations. WellPoint is an Inside Value pick. The Fool's disclosure policy is all about clarity.


Read/Post Comments (5) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 07, 2009, at 11:04 AM, oohbaby24 wrote:

    The initial quote says it all

    "I will tell you how to become rich. ... Be fearful when others are greedy. Be greedy when others are fearful."

    -- Warren Buffett

    But my main concern is, greed is what got our nation into this mess in the first place. Yes, now is the time to buy stocks-agree, Now is the time to invest, but I fear this will again spiral us back to the same problems.

    It was greed and corruption that caused the stock market collapse of 1929 (Same as today). Studies have said people became more careful with their money and investments after great depression and look where we are today.

    I guess my main question is, how can we invest in the markets without becoming too greedy and make sure this doesn't happen again?

  • Report this Comment On January 07, 2009, at 12:40 PM, kamuirei wrote:

    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.

    Go ahead and look at the S&P since Aug 26, 2008.

  • Report this Comment On January 07, 2009, at 1:48 PM, dividendgrowth wrote:

    Looks like those 55% of bearish advisers were right. It's die-hard bulls at TMF that got slaughtered since Aug 26 2008.

  • Report this Comment On January 07, 2009, at 1:49 PM, dividendgrowth wrote:

    I won't seriously go long until:

    1) Cramer got pulled off the air;

    2) Larry Kudlow and TMF turning bearish.

  • Report this Comment On January 07, 2009, at 6:34 PM, BTerry777 wrote:

    Yes greed did create the problem to begin with, but that is why Buffet say's to 'be fearfull when others are greedy'. Now with the majority fearfull...WWBD(what would Buffett do?) Be greedy! Great article.

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