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%.

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.

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.