Saturday, 23 June 2012
Why You Should Buy When Share Prices Are Low
'The Buffett Buy Signal' –
Warren Buffett has made millions from going against the crowd and buying when share prices are low, not when they're heading up.
Here are some examples...
During a high point in the markets, Buffett complained about how he was having trouble finding "first-class investment ideas". He held onto that view until 1974. From June 1968 to October 1974, the S&P 500 fell 37%. For the decade starting in June 1968, the S&P lost 2.6%.
Buffett changed his tune as the market fell. In late 1974, he made his famous comment that he felt like "an oversexed man in a harem" – meaning simply that he was awash in investment opportunities. The S&P 500 rose 11% per year over the next five years and 10% per year over the next decade.
During that bear market, Buffett bought shares in the Washington Post Company because he believed they were a bargain. Since then the price has soared by more than 100 times – and that's before you factor in dividends.
When the market slumped between 1977 and 1979, most investors got cold feet. Buffett toldForbes that stocks were still the way to go. The S&P 500 returned 9% over the next five years and 13% over the next 10.
Of course, that's Warren Buffett. He's a legendary and fabulously wealthy investor. How can the ordinary investor today tell the genuinely cheap shares from those that deserve their low price?