When the market starts to throw its toys out of the pram, investors tend to find themselves in an awkward position. On the one hand, as your hard-earned savings disappear in front of your eyes, you want to sell up and vow never to buy equities again, preferring to keep your cash stuffed under your bed. 

But on the other hand, when markets fall the financial press is usually filled with the advice of the world’s greatest investors, all of whom believe the best time to buy is when others are fleeing in panic. Financial writers usually take this opportunity to roll out what has to be Warren Buffett’s most overused, abused, misunderstood and misappropriated quote: “Be fearful when others are greedy and greedy when others are fearful.

The figures don’t lie

Buffett’s quote may be consistently misused in the financial press, but there is cold hard data to back it up. The data comes from a study conducted by Davis Advisors, the $40bn mutual fund powerhouse founded by Shelby Davis, one of the great value investors of the last century. The study, which was published six years after Warren Buffett came out with his “be greedy” quote, looked at the fortunes of four hypothetical investors who each invested $10,000 in the US market from 1 January 1972 to 31 December 2013. 

Each one of these four hypothetical investors reacted differently during the 1973 to 1974 bear market when the S&P 500 (the leading stock index in the US) fell by more than 50% in the space of six months.

The Nervous Investor sold out and went to cash as soon as the market started falling in 1973. The Market Timer sold out but moved back into stocks on 1 January 1983, at the beginning of a historic bull market. The Buy and Hold Investor held steady throughout the period but didn’t add to their investment.

And lastly, the Opportunistic Investor realised that the bear market had created opportunities and contributed an additional $10,000 to his original investment on 1 January 1975. The investor then reverted to a buy-and-hold strategy. Of these four investors, the Opportunistic Investor was the only one being greedy when others were fearful. He saw the value of his portfolio fall by nearly 50% but continued to buy despite widespread pessimism. 

On the way to a million 

So how did these investors fare over the long-term? Well, between 1 January and 31 December 2013 the Nervous Investor’s original $10,000 investment had increased by 90%, in nominal terms. If you factor-in inflation, the Nervous Investor’s real returns would be extremely disappointing. The Market Timer, who re-entered the market after it had recovered all of its 1973 to 74 losses, had achieved a nominal return of 2,508% by 2013. The Buy and Hold investor saw the original investment of $10,000 increase 6,444% by 2013 after riding out three of the greatest bull and bear markets in history. And finally, by the end of December 2013, the Opportunistic Investor was sitting on gains of 15,210%, the initial $20,000 had grown to $1.5m.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.