During the 2007-2209 severe bear market, there were many investors who cashed out of the market, at various stages of the unfolding bear. Many were happy that their capitals were not at risk during the turbulent bear evolving early stages. They were waiting to re-enter the market when it is 'safe' again. Just as they might not have cashed out at the 'right time', likewise, they might not have re-entered the market at the 'right time'.
What defines safety for these investors? They are probably referring to not losing their existing capital. Of course, the safest place was the money market or the fixed deposits. At which point in the bear market will they re-invest into stocks? During the slippery downturn, during the ups and downs, or when the market has turned up convincingly. I suspect many such investors having 'rescued themselves' or 'cashed out' of their stocks will not put their cash back to work until the market has turned up convincingly. This means they would have lost out on the fantastic return of the market during the last 2 months.
Therein is the difference between Warren Buffett and fellow value investors, and the general crowd. They bought at the time when everyone was fearful, probably committing more money into stocks too. The few value investors who spoke on Bloomberg or CNBC during the severe downturn sharing their views that they were net buyers appeared silly in the public eyes when the stocks prices sank further. But events have since proven these value investors to be more right than wrong.
Having a good knowledge of the risk/reward ratio offered by the market is helpful. The safest time to invest is when the market is at its low. This is also the time when the downside risk is small, though not completely eliminated, but the potential for upside gain is high.
Warren Buffett was right again. He asked to 'Buy America' in October 2008 when the US and world market 'fell off the cliff' following the Lehman collapse. For those who have bought following his call, subsequent events should have ensured good returns.
How can we aim for higher returns? Here is another lesson from Warren Buffett on this. What Ben Graham did was to inspire Warren Buffett with his investment strategy of buying bargain stocks that were selling below book value regardless of the nature of the company's long-term economics. This was something Warren Buffett was able to do with great success during the 1950s and early 1960s. But he stayed with this approach long after it wasn't viable anymore - the chains of habit were too light to be felt. When he finally woke up in the late 1970s to the fact that the Graham bargain ride was over, he shifted over to the strategy of buying exceptional businesses at reasonable prices and then holding them for long periods - thereby letting the business grow in value. With the old strategy he made millions, but with the new one he made billions.
As Buffett modified his strategy aiming for higher returns in the late 1970s, we should also regularly re-appraise our philosophy and strategy, through acquisition of appropriate investing knowledge, skills, and its better execution. There is definitely a 'holy grail' in value investing; to benefit from this hugely requires a deeper understanding of its core principles and better execution by the practitioners using proven safe strategies. So far, none is better than Warren Buffett, the accomplished sage. So much has been written on his strategy and method, and we only need to emulate these.
Aiming for safety of capital with a reasonable return was the initial goal. With increasing knowledge and skill, perhaps, aiming for safety of capital and higher returns are achievable. The returns of many investors are compromised by certain knowledge they possess and certain knowledge they do not have. Of course, you may not know what you don't know. Investing is a life-long passion for some. Having a good investment philosphy and strategy is the key. There is constant learning and re-learning. Some knowledge needs to be unlearned. As Warren Buffett said, "The chains of habit are too light to be felt until they are too heavy to be broken."
Also read:
You've Sold Your Stocks. Now What?
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