Worldwide Success

Warren Buffett, one of the richest and most respected investors in the world said he is buying stocks right now.  He is the first one to admit that he does not have the faintest idea of what stocks will do in a month or even in a year.  But he knows one thing - in the long-run, stocks will do spectacularly well.

You may be skeptical, and rightly so.  After all, the last ten years have been absolutely awful for stocks.  If you are relatively new to investing, your own experience may be telling you not to believe the rhetoric from famous investors like Buffett.  If you are in retirement or near retirement, the fact that stocks will do well in the long-run is hardly a motivating factor for you to stay in the market.

Fear is widespread among investors throughout the world right now.  Some people are even swearing off stocks forever, as related in the article Some Investors Grow Leery of Stocks in Grim Market.  According to Buffett, this is exactly why this is a great time for buying stocks, as he is a strong believer of the successful investors’ mantra:

When others are greedy, be fearful.  When others are fearful, be greedy.

So what should you be, fearful or greedy?  Once again, it all depends on your time horizon and risk tolerance.  It is easy for Buffett who has billions of dollars to take some risks and invest at this time when everyone else is fearful.  But for the guy who has worked his entire life to build a nest egg and who just saw almost half of it disappear overnight, it is very difficult to be greedy right now.

So let’s go back to some very important fundamentals of investing to help guide us through this difficult time.  The most important question you should be asking yourself right now is:  “when do I need the money?”  Then take a look at history to help guide your decision.  First look at the absolutely worst case scenario - The Great Depression.  In that period between 1929 and 1932 stocks dropped by more than 80% and it took 25 years to recover.  Despite of recent talks of a depression, it is unlikely that the current situation will be as bad as what was experienced then.  That is because governments around the world are taking very strong action to avert such terrible outcome, something that was missing back then.

How about other recessions or bear markets?  It took 7 ½ years for stocks to recover from the 1973-74 recession, but on average it takes 3.6 years to break even after a bear market.  The average loss of the S&P 500 in the last six bear markets was 31%.  This bear market has already exceeded the average by at least 9 percentage points.

So the bottom line is this.  Although no one can predict when we will reach a bottom, we have already surpassed the average loss in a bear market by a significant amount, so further significant losses become statistically less likely.  The problem is that it may take several years for the market to recover, so if you need the money soon, you may not want to be invested in the stock market right now.

But for someone who has a 10 year time horizon in front of them, this may be the opportunity of a lifetime.  Stocks haven’t been this cheap in 5 years, and there are many solid companies out there that are selling at a 50% discount.  So if time is on your side, and you can tolerate some risk, you may want to consider the wisdom of another very successful investor, Shelby Davis:

“You make most of your money in a bear market, you just don’t realize it at the time”

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