Warren Buffet once said, “Be fearful when others are greedy, and greedy when others are fearful.” This quote is famous all over Wall Street, so why is it so difficult for many investors to follow this wisdom? Every time I hear this quote, I can’t help but think of the Seinfeld episode where George decides to do the opposite of everything he normally would, and lands his dream job with the New York Yankees.
This principle of doing the opposite of what your instincts tell you, often applies in the world of investing. The best time to buy is often when it feels the worst, and the best time to sell is often when there are seemingly no problems on the horizon. When the market is in a drawdown, and it seems like the bad news won’t stop coming, investors tend to shy away from adding to stocks. This creates even cheaper prices, pushing potential forward returns even higher. When the market is humming along, and everyone is ignoring bad news, investors tend to chase, and buy at extreme levels, pushing potential forward returns lower.
This becomes even more apparent when looking at Bank of America’s monthly fund manager survey. Individual investors and fund managers had some of their lowest allocation to equities in early 2003, early 2009, and coming into 2023. Coming off horrible returns in 2002, 2008, and 2022, investors shied away from equities.
These all would have been great buying opportunities, with the 1-year forward returns listed below.[2] Looking at the other instances on the sentiment chart paints a similar picture. When sentiment is at its worst it's often a good time to buy.
Conventional wisdom in markets is, "Buy low, sell high", but when markets experience extreme drawdowns, investors often say “I just can’t take it anymore” and sell at the bottom, or stop allocating to stocks altogether. Then, when markets bounce back, they eventually can’t stand missing out any longer, and buy back in. Instead, they may want to follow the wisdom of George Costanza and Warren Buffet, and do the opposite of what feels comfortable.
Disclaimer: The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
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