“Be fearful when others are greedy and be greedy when others are afraid.”
This investment rule seems timely for so many reasons, but no more than the fact that it was enacted in 2008 by legendary investor Warren Buffett, who hosted the annual general meeting of his successful Berkshire Hathaway company in Los Angeles yesterday.
Tens of thousands of Buffett fans watched the AGM via live online stream as the Manner of Omaha and his loyal Lieutenant Charlie Munger shared their views on markets, the US economy, corporate governance and more.
Inspiration: Legendary investor Warren Buffett, nicknamed the Omaha sage
The 90-year-old Buffett is best known for his investment sayings, many of which are now embedded in good investment practice: “Just buy something for less than it’s worth” (don’t buy a stock unless you believe that it is undervalued).
And: “Regardless of whether it is socks or stocks, I like to buy quality goods when they are unsubscribed” (price drops are an opportunity to increase your stake in a company).
The one related to fear and greed is based on the fact that it often pays investors to be contrary.
In other words, they should be careful about buying stocks in a company when prices are skyrocketing as they may end up overpaying.
Likewise, they should be brave when others are afraid, as this could be a good buying opportunity.
The saying applies to stock markets as much as it does to individual stocks – sell when the markets look expensive and buy after they fall.
Before the Berkshire Hathaway general meeting, I was reminded of Buffett’s words by Liverpool reader Ian Parkinson. He contacted me seven days ago to thank me for some advice on wealth I gave in the teeth of the coronavirus storm last March.
Advice – namely, being greedy when others are afraid – has given his investment portfolio considerable shine.
Ian, who runs his own business repairing damaged car upholstery and broken air conditioning, responded to an article I wrote on March 22nd last year – the day before the country was closed.
It was written after stock markets – not just here but around the world – fell more than 30 percent in just a month as fears of a global pandemic mounted.
The play had two investment messages.
First, I begged investors to overcome the stock market storm. Second, heeding Buffett’s words, I suggested that investors try to invest in some of the most robust investment trusts in the country.
These publicly traded investments offered investors a number of comforting comforts. First, their longevity – many of them have been around a long time and have weathered all kinds of market fears (worse than March 2020).
Second, they tend to have low management fees that don’t materially detract from investor returns – or exaggerate losses.
Third, they are broadly based, either in a diversified portfolio of UK or international stocks.
Fourth, they have a good track record of carefully managing the income they generate from their investments – which they ultimately pass on to shareholders as dividends.
By not paying out all of the earnings they receive, but putting some of it in reserve, they can build an income defense fund that they can use to top up payments to shareholders when things get tough.
Finally, many investment trust stocks were beaten – cheap as chips.
The 13 trusts I proposed (see table) were all supported by dividend income of at least one year in reserve and dividend growth of at least 20 years.
58-year-old Ian decided to invest £ 1,000 in each of the 13 through his Fidelity Isa. “I had some money to spare,” says Ian, who is married to Gwen, 56, a National Health Service administrator.
“I could have thrown it away, but I decided to invest instead. I have an eye on retirement and while I’ve had a healthy retirement age to look forward to since my time at Royal Mail, it’s nice to have other sources of retirement savings available. ‘
Ian’s boldness about investing served him well. As the table shows, the £ 13,000 he invested has grown to around £ 22,665 – a return on investment of more than 70 percent (slightly less after Fidelity’s platform fees and the fact that he didn’t automatically reinvest all of the income he received ).
Unsurprisingly, he’s excited. ‘Many Thanks. If it hadn’t been for your item, I probably would have kept the money in the bank. ‘
Financial analyst Laith Khalaf of wealth platform AJ Bell is impressed with the investment acumen Ian has shown.
He says, “Buying in falling markets is one of the hardest things to do because fear is contagious. But if you keep a straight head, which is paramount, it can pay off well, as Ian has proven. ‘
Ian accepts that the investment returns he’s had since March last year are unlikely to be matched next year.
But he’s content to hold onto his trust. Of the 13, only Temple Bar cut its annual dividend payments, though this was more than offset by strong price gains.
Most of the remaining 12 have reduced their reserves of income to support shareholder dividends, though nine still have enough income in their tanks to pay at least the equivalent of last year’s dividend – a reassuring fact.
Over the past decade, the average investment trust has returned 189 percent.
According to Khalaf, stocks are no longer in “cheap territory”, especially in the US. He adds: “The big upswing from last year’s market lows can be seen in the rear-view mirror, so a slower return can be expected from now on.”
However, he believes there is little scope for bad news this year unless vaccines aren’t as effective as expected.
His last piece of advice? Set up a savings plan that invests your money in the market every month. “This makes for a smoother journey,” he says, “and makes timing an investment a breeze.”
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