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 situation, investors should be paying attention to those words, and the following bit of information only makes his 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 expect the stock market to decline over the next 12 months.

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 return, 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 (NYSE: WFC  ) 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. Buffett still owns about 8.8% 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, 3/31/03

Debt-to-equity, 12/31/02

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

Barrick Gold (NYSE: ABX  )

$8.4 billion

23.4%

179.2%

Fluor (NYSE: FLR  )

$2.7 billion

2.0%

319.1%

Helmerich & Payne (NYSE: HP  )

$1.3 billion

22.3%

265.9%

T. Rowe Price (Nasdaq: TROW  )

$3.3 billion

4.9%

268.7%

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 health-care giant Johnson & Johnson (NYSE: JNJ  ) , but he's also recently expanded his position in drugmaker Sanofi-Aventis (NYSE: SNY  ) . And of course, he recently made a sizeable investment in General Electric.

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?" 

It's "Am I going to be greedy?"

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

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Fool Jim Mueller usually isn't greedy, but this fall has been an exception. At the time of publication, he owned shares of J&J and was a beneficial owner of GE, but not of any other company mentioned. J&J is a recommendation of Motley Fool Income Investor. The Fool's disclosure policy is all about clarity.


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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 November 01, 2008, at 10:41 AM, oldfool48 wrote:

    There should be another answer to the Motley Poll question.

    "What changes are you making to your portfolio?"

    "Portfolio? What Portfolio? I'm broke".

  • Report this Comment On November 03, 2008, at 9:31 AM, tonywrites wrote:

    I know "fear" and "greed" are hot buttons to push if you want to get someone's attention on "how to become rich", but it's very short-sighted.

    Mr. Buffett needs to remember that life comes with an expiration date.

    Still, he has a valid point.

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