The Greatest Buying Opportunity of Our Time

by Cameron Schaefer on October 24, 2008

I’m currently sitting on my couch listening to newscasters on television report the latest drop in the stock market with gloom face and menacing tone. Even those who don’t follow the market have not been able to escape the constant coverage of the current financial storm that has hit markets both at home and abroad.

Here are just a few of the headlines in the news recently:

“Wall St tumbles on economic anxiety”
“Recession to be ‘Worse than the 1990′s,’ experts warn”
“Markets latest lurch down raises new uncertainty”

In the midst of such volatility, misinformation and outright confusion, it has been hard to draw any logical conclusions. But, surveying the scene over the past month an age-old lesson in skilled investing has resurfaced:

When the market is going down in flames, seasoned investors see incredible buying opportunities where novices see only doom and gloom.

Warren Buffet, billionaire investor, recently wrote on Op-Ed piece in The New York Times where he said the following (emphasis mine):

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Everyone likes to say the key to investing is, “Buy Low, Sell High”, but how many people actually follow their own advice? Startlingly few, actually. Most people tend to follow the herd, buying stocks when the buzz of how well the market is doing finally reaches their ears and selling when they hear on the news that things are bad. Thus, they do the exact opposite, buying when stocks are inflated by market hype and selling when they have been beaten down.

So why is now such a great time to buy? Because what we essentially have is a HUGE STOCK SALE! Some great companies are selling for half, even 75% less than what they were a year ago. What this means is for every share you could have bought a year ago you can now buy 2 or even 3 for the exact same price.

Right now is an incredible time to buy.  This is the opportunity that seasoned investors recognize that others do not. And it’s why some people will get rich off the current situation while others will go broke.

There’s no doubt we’re in hard times, but part of skilled living is keeping your head in the midst of stressful and complicated situations. When others are scared and running for the hills there are some that come out swinging. Learn from those people and imitate them.

I leave you with some final words of wisdom from Buffett:

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

{ 7 comments… read them below or add one }

Ankesh Kothari October 24, 2008 at 11:11 pm

Thanks Cameron for a timely post.

I agree that its the perfect time for buying. (I just put some money in the Indian stock market which crashed too.)

I don’t agree that we should buy stocks now because “Some great companies are selling for half, even 75% less than what they were a year ago. ”

You should build a stock strategy that has 3 *rules* to it:
1. Entry – when to buy stocks
2. Exit – when to sell stocks
3. Position sizing – how to diversify and maximize your returns

If you don’t have all 3 rules written down before you invest, your chances of succeeding will go down like crazy.

These rules should not change whether the stock market is up or down. The only thing that should change is the intensity of action that the rules bring *automatically*.

(So if you are a value trader and have a entry rule like you’ll invest in stocks only with high ROA and low P/E – then when the stock market is bullish, you’ll find very few stocks to buy. And when it crashes, you’ll find a lot more stocks to buy. But at any time, you’ll be buying stocks because they show good promise which is indicated by their ROA and P/E ratios. Don’t buy stocks just because the market is down. There are still a few stocks out there that are still over valued – even today.)

Cameron Schaefer October 25, 2008 at 7:44 am

@ Ankesh,

You are right when you say you shouldn’t just buy because a stock is discounted without first running the numbers. I was trying to simplify things for the average joe, but due diligence is a necessary part of every investment, so thanks for pointing that out.

That being said, my basic point was simply that it is much smarter to buy a company like GE or Coke at a discount and the time for great discounts is now.

I’ve always been interested in investing more in India and China. Sometime you will have to give me an education on some of the various companies that you like.

Jason October 25, 2008 at 2:50 pm

Well said, Cameron. If an increasing rate of investors acquire the undervalued stocks there would be a corresponding softening of the losses in market value that arise from fear inspired sell-offs.

Ray The Money Man October 25, 2008 at 3:33 pm

Buy and hold is dead. What is so hard about taking your profits. If you have an obsurd profit why not take it. At least sell 1/2 or 3/4 of your position. These stocks do not go straight up and with all that has happened this year, take your profits!

Great post!

Sara at On Simplicity November 5, 2008 at 10:51 pm

This is one of the best things about being in my twenties: everything’s an opportunity. Reading Peter Lynch talk about Black Monday is another Buffet-esque reminder that downturns are sales in disguise. Thanks for showing the other side of the coin!

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