Buffett: The time to buy stocks is when nobody else wants them

In the recession of 20087 - 2009 we had the opportunity, and for those of us who did venture into that abyss, the rewards were tremendous.

Here is a quote from Warren Buffett during the 1990-1991 recession in the U.S.:

"Nevertheless, fears of a California real estate disaster similar to that experienced in New England caused the price of Wells Fargo stock to fall almost 50% within a few months during 1990.  Even though we had bought some shares at the prices prevailing before the fall, we welcomed the decline because it allowed us to pick up many more shares at the new panic prices.

Investors who expect to be ongoing buyers of investments throughout their lifetimes should adopt a similar attitude toward market fluctuations; instead many illogically become euphoric when stock prices rise and unhappy when they fall."

Some of the Sage's less well-known sayings are perfect advice for times like these.

Published on 24 May 2012

Without doubt, Warren Buffett, the boss of Berkshire Hathaway (NYSE: BRK-B.US), has said some very smart things. Which, when you think about it, isn't surprising.

Because he wouldn't have made so much money in the first place if he wasn't smart, and -- let's face it -- he's a gregarious chap who's very happy to share his thoughts with those investors who have put their money into Berkshire Hathaway.

At this year's investor-fest in Omaha, for instance, Buffett and co-investor Charlie Munger once again held the stage for several hours, fielding questions from all and sundry.

Sage words

The trouble is, when it comes to the answers, many of us have selective hearing. One result of this is that some of his best known quotes are only partly reproduced.

Take, for instance, Buffett's famous remark that "our favourite holding period is forever". What it doesn'tmean is cling like a dog with a bone to the dross in your portfolio. Because Buffett can, and does, sell.

The full quote is this: "When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever."

And that, I think you'll agree, is a rather different proposition.

Another problem, frankly, is wishful thinking. Personally, I think that this famous quote is one of his worst quotations, devoid as it is of anything that an investor can actually do or influence: "Rule No. 1: never lose money; rule No. 2: don't forget rule No. 1."

What does it mean? What are you actually supposed to take away from it? It might be a worthy aspiration, but it certainly isn't actionable advice.

Cometh the hour

But, interestingly, it turns out that three of his less well-known quotes are loaded with actionable advice. And it's advice, what's more, that plays perfectly to today's turbulent and nervous markets.

And without further ado, here they are:

• "The best thing that happens to us is when a great company gets into temporary trouble... We want to buy them when they're on the operating table."
• "The most common cause of low prices is pessimism -- sometimes pervasive, sometimes 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."
• "The stock market is a no‑called‑strike game. You don't have to swing at everything -- you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'"

The common refrain running through all three? It's perhaps best summarised by yet another Buffett quote: "You pay a high price for a cheery consensus."

In short, you'll make the most money by sitting on your hands in the good times, and then buying good businesses in the bad times.

And if that doesn't sound like a recipe for success in today's turbulent times, I don't know what does.

Wired for failure

Now, human nature being what it is, many investors do the exact opposite.

When they're feeling buoyant and bullish, they pile in to the stock market. Look no further than 1996-1999, for instance. Or 2005-2006.

Then, when stock markets crater, they sell -- as they did in 2008 and 2009, to choose another example.

And they certainly don't buy when the market is at rock bottom. Which led to an awful lot of investors getting caught out by the meteoric rise of the FTSE 100 in the months that followed March 2009.

Looking for bargains

Hopefully, you'll already have your eyes on stocks priced at bargain levels.

Personally, I'm looking at topping up my holdings in BP (LSE: BP), BAE Systems (LSE: BA) and GKN(LSE: GKN). The news surrounding the first two, in particular, is gloomy. But the basic businesses are sound.

Or I may just throw some money at the index, via one of my tracker funds, or via Vanguard's new low-cost FTSE 100 ETF, the Vanguard FTSE 100 ETF (LSE: VUKE) -- which is now live and trading, by the way.

That's just me, of course. But if you'd like to know what Warren Buffett himself has loaded up on, then a free Motley Fool special report -- "The One UK Share Warren Buffett Loves" -- can be in your inbox in seconds.

http://www.fool.co.uk/news/investing/2012/05/24/3-buffett-sayings-that-will-make-you-money.aspx?source=uhpsithla0000002

This is the opportunity facing you today. You could be at the forefront of the largest gains when the tide turns.

Sure, there may be volatility in the market for some months ahead. Years even. But this should NOT stop you from taking control of your financial destiny.

Your money might survive being mothballed in a bank account, gathering a feeble 1% or 2% per year. But unless you can get a pay rise or a windfall sometime soon, nobody is going to help you grow your wealth in the many alternatives available.

At some point, the markets will rise again, and – in our view – those who are already invested in rock-solid shares should make serious gains.

I'm old enough to remember all sorts of stock market crashes and periods of underperformance -- the causes and durations of which are long since lost in the mists of time.

What I do know is that markets eventually recover, and carry on heading upwards – carrying our stocks, and investment wealth, with them.

This is the opportunity facing you today.

You could be at the forefront of the largest gains
when the tide turns

The majority of private investors are too scared by what happened in the last few years to invest right now.

But looking backwards and doing nothing is not the way to take control of your financial destiny.

Think of it this way. You'd be crazy to drive your car whilst spending all of your time looking in the rear-view mirror.

And yet many people invest like this. They assume that because 2011 was a tough year for the world's stock markets, 2012 will be just as bad.

But the financial world doesn't work that way, especially the stock market. The past is... well... history.

The tide turns when everyone least expects it. The more obvious the market's direction seems, the greater the odds that you're wrong.

As Floyd Norris of The New York Times has pointed out that, for the past half-century, the market has moved in 15-year cycles where returns swing from spectacular to near-zero.

In 1964, the average real return over the preceding 15 years was a stellar 15.6% a year.

Then it flipped. By 1979, the previous 15 years produced a negative real return.

Then it flipped again.

By the late 1990s, 15-year average returns were near record highs. And again – as of the end of last year, stocks returned a measly 3% a year over the last 15 years.

The trend is clear: After booms come busts, and after busts come booms.

Sound crazy? It sounded crazy in the early 1980s, too.

So did the notion 10 years ago that we were about to face a decade of stagnation.

That's always how these things work. After booms come busts, and after busts come booms. Happens over and over.

Of course, history isn't guaranteed to repeat itself. And what drives stocks to a decade of low or high returns isn't the calendar: it's valuations. Stocks do well after they're cheap, and poorly after they're expensive. So the real question shouldn't be how long stocks have been stagnant, but whether they're cheap.

And right now we believe they are.

https://www.fool.co.uk/shop/secure/order-01.aspx?dc=ccd70129-62cb-417b-a440-99de3c029d1a&sf=0512_hb_plndr_L1&pd=07&source=u74spoeml0000189

How rock-bottom airline shares made bold investors 400% gains

How rock-bottom airline shares
made bold investors 400% gains

After the September 11 terrorist attacks, shares in airlines were understandably out of favour.Boeing's shares hit rock bottom about a year after 9/11. But it was sentiment and fear driving the share price so low, not the fundamentals of the company. A bit of clear analysis would have told you that was a buy opportunity.

If you'd bought Boeing shares in 2002, you would have watched them soar to FOUR TIMES their value within 5 years.

The rule is, buy when share prices are depressed. Warren Buffett puts it this way...

"When hamburgers go down in price, we sing the Hallelujah Chorus in the Buffett household. When hamburgers go up, we weep. For most people, it's the same way with everything in life they will be buying except stocks. When stocks go down and you can get more for your money, people don't like them."

When the mood is pessimistic, and sentiment – not facts – drives prices down, then that's the time to buy.

https://www.fool.co.uk/shop/secure/order-01.aspx?dc=ccd70129-62cb-417b-a440-99de3c029d1a&sf=0512_hb_plndr_L1&pd=07&source=u74spoeml0000189

Buying Time

When the market hits its low, true value investors feel that harvest time has arrived.

"The most beneficial time to be a value investor is when the market is falling," says institutional manager Seth Klarman.  There are plenty of companies ripe for the picking.

In the summer of 1973, when the stock market had plunged 20 percent in value in less than 2 months, Warren Buffett told a friend, "You know, some days I get up and I want to tap dance."

Unfortunately, this is the time when investors are feeling most beat up by the markets.  Fear and negative thinking prevail, and anyone who has faced down a bear knows how paralyzing fear can be.  This, at the depths of a bear market, is the time to buy as many stocks as are affordable.

Value bargains aren't found in strong market.  A good rule is to examine stock markets that have reacted adversely for a year or so.

Undervalued stocks quite often lie dormant for months - many months - on end.  The only way to anticipate and catch the surge is to identify the undervalued situation, then take a position, and wait.

Benjamin Graham: "Buying a neglected and therefore undervalued issue for profit generally proves a protracted and patience-trying experience."

Warren Buffett on investing in a climate of fear

Warren Buffett on investing in a climate of fear 

– a Q1 letter to send clients

April 12, 2010

"I have no idea what the stock market will do next month or six months from now. I do know that, over a period of time, the American economy will do very well and investors who own a piece of it will do well."

Warren Buffet in an interview on CNBC on Friday, October 10, 2008

After the market roller coaster of 2008 and 2009, the first quarter of 2010 has been blessedly uneventful by comparison. The US markets gained about 5% in the first quarter, the best start to the year since 1998 - the US market ended up about 60% from its lows of a year ago. Canada did well also, up almost  3% in the first quarter.

That said, there is still a cloud of uncertainty that is making many investors nervous.

Causes for concern ... and for optimism

Even with the stabilization of the global economy, there's no shortage of short term causes of concern:

... continued questions on the direction and timing of the economic recovery in the United States and Europe and the timing of higher interest rates

... US housing prices that are staying stubbornly low and unemployment levels in North America and Europe that are stubbornly high.

... and in late March the deputy director of the International Monetary Fund made headlines as he talked about the need for advanced economies to cut spending in order to reduce deficits. 

Here's a New York Times article about the IMF's views: http://www.nytimes.com/2010/03/22/business/global/22imf.html?scp=1&sq=lipsky%20imf&st=cse

The good news is that there are offsetting positives, even if the media headlines that feature them aren't quite as prominent:

... on Monday March 22, the Wall Street Journal ran a story about dividend hikes as a result of rising profits by US companies. The article also mentioned that cash on hand on US corporate balance sheets was at the highest level since 2007.

... on the same day the Financial Times ran a similar story about dividend increases in Europe

... and there's growing attention to the impact that Germany's emphasis on manufacturing productivity had in sheltering it from the worst of the economic downturn - and questions about whether  this might be a model for other countries. In March the Economist ran a 14 page feature on how Germany positioned itself for success.

Forecasting the future

Whether you choose to focus on the positives or the negatives, there's broad agreement that the steps taken by governments stabilized the financial crisis that we were facing a year ago - and there is almost no talk today of a global depression.

So the issue is not whether the economy will recover, but when and at what rate -and whether there might be another stumble along the way.

If you look for investing advice in the newspaper or on television, the discussion tends to revolve around what stocks will do well in the immediate period ahead ... this week, this month, this quarter.

We refuse to participate in that speculation - when it comes to short-term predictions, whether about the economy or the stock market, there's one thing we can say with virtual certainty: Most of them will be wrong.  Quite simply, no one has a consistent track record of successfully forecasting short term movements in the economy and markets.

Which is why in uncertain times such as today, one of the people I look to for guidance is Warren Buffett.

Advice from Warren Buffett

In an investment industry poll a couple of years ago, Warren Buffett was voted the greatest investor of all time; among the runners up were Peter Lynch, John Templeton and George Soros.

Buffett's returns are a testimony to the power of compounding.  From 1965 to the end of 2009, the growth in book value of his investments averaged 20% annually. As a result, $10,000 invested in 1965 would currently be worth a remarkable $40 million. By contrast, that same $10,000 invested in the US stock market as a whole, returning just over 9% during this period, would be worth $540,000.

In one of his annual letters to shareholders, Warren Buffett wrote that it only takes two things to invest successfully - having a sound plan and sticking to it. He went on to say that of these two, it's the "sticking to it" part that investors struggle with the most. The quote at the top of the letter, made at the height of the financial crisis, speaks to Buffett's discipline on this issue.

I try to apply that approach as well - putting a plan in place for each client that will meet their long term needs and modifying it as circumstances warrant, without walking away from the plan itself.

Boom times such as we saw in the late 90's and scary conditions such as we've seen in the past two years can make that difficult - but those conditions can also represent opportunity. Indeed, in his most recent letter to shareholders Buffett wrote that "a climate of fear is an investor's best friend."

Five core principles that shape our approach

On balance, I share Warren Buffett's mid term positive outlook, not least because many of the positives that drove market optimism two years ago are still in place, among these the continued emergence of a global middle class in developing countries like Brazil, China, India and Turkey. This educated middle class will fuel global growth that will make us all better off.

In the meantime, here are five fundamental principles that we look for in money managers and that  drive the portfolios that we believe will serve clients well in the period ahead.

1.     Concentrate on quality                                          

 The record bounce in stock prices over the past year was led by companies with the weakest credit ratings. Some have referred to last year as a "junk rally", with the lowest quality companies doing the best.  That's unlikely to continue- that's why I'm focusing my portfolios on only the highest quality companies, those best able to withstand the inevitable ups and downs in the economy.

2.     Look to dividends

Historically, dividends made up 40% of the total returns of investing in stocks and have also helped provide stability through market turbulence. Two years ago, quality companies paying good dividends were hard to find - one piece of good news is that today it's possible to build a portfolio of good quality companies paying dividends of 3% and above.

3.     Focus on valuations

Having a strong price discipline on buying and selling stocks is paramount to success - history shows that the key to a successful investment is ensuring that the purchase price is a fair one. Investors who bought market leaders Cisco Systems, Intel and Microsoft ten years ago are still down down 40% to 70%, not because these aren't great companies but because the price paid was too high.

4.     Build in a buffer

 Given that we have to expect continued volatility, we identify cash flow needs for the next three years for every client and ensure these are set aside in safe investments. That buffer protects clients from short term volatility and reduces stress along the way.

5.     Stick to your plan

In the face of economic and market uncertainty, another  key to success is having a diversified plan appropriate to your risk tolerance - and then sticking to it. It can be hard to ignore the short-term distractions, but ultimately that's the only way to achieve your long term goals with a manageable amount of stress along the way.

In closing, let me express my thanks for the continued opportunity to work together.  Should you ever have any questions or if there's anything you'd like to talk about, my team and I are always pleased to take your call.

Name of advisor

P.S. If you're interested, here's a link to Warren Buffett's 2010 letter to investors:                       http://www.berkshirehathaway.com/letters/2009ltr.pdf

http://clientinsights.ca/article/warren-buffett-on-investing-in-a-climate-of-fear-a-q1-letter-to-send-clients

A Q1 letter to send clients - Warren Buffett on investing in a climate of fear 

An important note:

Over the past 18 months, the quarterly templates for a client letter have ranked among the most popular features on this site.

Research with investors has identified the five elements of an effective client letter. It has to be:

1.     balanced in outlook

2.      candid

3.     short enough for clients to get through comfortably but long enough to be substantial

4.      supported by facts

5.     indicative of the advisors voice and personality

On this last point, if you like the basic structure of the letter, you MUST take the time to customize it to your own philosophy and outlook - I can't emphasize this strongly enough.