Credit: Shutterstock photoAs Martin Luther King Jr. Day has passed, one of his quotes still resounds: " The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy." As I was re-reading one of Warren Buffett ( Trades , Portfolio )'s most famous articles, this New York Times piece, it becomes very clear that a true value investing strategy is tested during times of turbulence, but most importantly, the character to stay away from fear and seize those opportunities to establish aggressive positions.
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How was it possible that during the immense crisis that the markets were going through, there were some investors not only allocating all their available funds, but also asking for more contributions, as Seth Klarman (Trades, Portfolio) did? Buffett answered this with the following logic:
"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."
Buffett was very clear that while some of the entities were not enjoying good fundamentals, the market panic created bargain prices for those companies that were more prudent. Also, Buffett provided a good reminder that it is not logical to expect ever-rising earnings, since it is normal to have decreases or stagnation periods; this is all part of the business cycle. However, when we take a look at great companies, especially with wide moats as Buffett likes them, we have to open our view and start to really think long-term, which is five to 20 years from now.
In recent weeks, it has come to my attention that nearly every headline worries about where the market will head at the next opening bell. It seems that every story will have a negative impact and it is in this fear environment where opportunities are created. When we combine some available funds with courage and a margin of safety, probabilities are on our side for a good outcome. It is important to be patient, but once we see a good opportunity, we should take them. As Buffett says, if we wait for news to confirm our thesis, then the price will have risen already.
"Let me be clear on one point: I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month - or a year - from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over."
"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."
By anticipating the market while it is enduring some pessimism, combined with a margin of safety, it is very likely that we achieve good results. We must always remember that the market pendulum is always swinging, and make our bets according to where we believe things are going to be in the long run, not the next month. Reading Buffett's writing is always enlightening, and during market turmoil, reading him also proves to be a rational oasis.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
