When Buffett Was Right, but We Were Too Scared

Oct 31, 2013

When Buffett Was Right, but We Were Too Scared


Just over five years ago, global financial institutions appeared on the verge of collapse and stocks were sinking, Warren Buffett wrote an op-ed in The New York Timesthat seemed, at that time, out of touch with the pulse of the market. He encouraged investors to buy. Buy? Mr. Buffett, then 78, appeared to finally have succumbed to a senior moment. Of course, it was great advice. Unfortunately, not enough of us followed it.“The financial world is a mess, both in the United States and abroad,” Mr. Buffett wrote. “Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.”

But, he added, he was buying stocks for his personal account.

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful,” Mr. Buffett wrote. “And most certainly, fear is now widespread, gripping even seasoned investors.”

We all know what has transpired since. The Dow Jones Industrial Average has nearly doubled. It is up 88% and closed Tuesday at a record high of 15680. The S&P 500 Index has performed even better. It’s up 97% to above 1770.

Mr. Buffett was not only right – and right in a big way – about the buying opportunity. He was right about the fear. Most of us stayed fearful for too long.

After pouring an average of $404 billion annually into mutual funds through 2008, investors pulled $150 billion out in 2009, according to the Investment Company Institute.

Since Mr. Buffett told investors to buy, investors have pulled $309 billion from total equity funds and a whopping $448 billion from domestic equity funds, according to ICI.

But what’s alarming is the fear has persisted.

A survey released this week by asset manager BlackRock Inc.BLK +0.94% found that most Americans still are skittish when it comes to investing in anything. They keep 48% of their investible assets in cash, just 18% in stocks and 7% in bonds.

Now, there’s a feeling among investors that they’ve missed out. Thirty-six percent of respondents said they wished they had invested for retirement sooner.

Investors have come back this year, as the year-long rally suggests, but they’ve come back after most of the gains were made.

Investors so far this year have added $106 billion to equity funds, but it has hardly made up for the selling of the last three years. From August 2010 to August 2013, investors have pulled $195 billion from equity funds, according to ICI – and that includes recent buying.

There’s really only one conclusion to draw from this. Despite Mr. Buffett’s reputation as an “oracle” of investing, we don’t listen.

To be fair, there was plenty of evidence to ignore him. Less than six months after his advice was published, the S&P 500 fell another 24%. The Dow Jones Industrial Average sank 20%.

Even after the rally started slowly and surely thereafter, a series of events made stock investing appear dicey.

There was the Greek and European debt crisis. French, Cypriot and Italian bank crises. Falling home prices. The “flash crash” in May 2010. The federal government budget “sequestration.” There have been multiple stand-offs in Washington over the debt ceiling and, most recently, a government shutdown that put a kink in the recovery.

Yet none of these troubles really sank the broader market for an extended period of time. Volume was light in the markets, but what little action that was happening was predominantly buying.

For those few who heeded Mr. Buffett’s advice, it has been a very good five years.

For the rest of us, we were fearful when we should have been greedy.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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