Warren Buffett is known for telling investors to be greedy when others are fearful. This involves buying shares when everyone thinks that prices are about to go down.
In my view, Buffett’s advice might be more important now than it has been in a long time. With fear in the markets, it’s time for me to be greedy.
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Fear
I think that investors are fearful at the moment. Both the FTSE 350 and the S&P 500 are significantly lower than they were at the start of the year.
Share prices have been coming down as central banks attempt to bring inflation under control by increasing interest rates. The result has been a decline in stock markets.
At the moment, investors are anxiously monitoring the economic situation. The prospect of more rate increases or even a recession is continuing to weigh on stocks.
As stocks fall, market participants seem to be less and less willing to invest. Their concern is that if they buy shares in a company today, they might find that their investment is down 10%, 15%, or 20% next month.
One of the best examples of this is Netflix. A year ago, the stock was trading at around $497/share and investors were enthusiastically buying shares.
Today, the stock is much cheaper, with the share price under $176. But instead of taking advantage of the discounted valuations, investors seem to be holding off buying in case the stock has further to fall.
This tells me that there’s fear in the stock market. And I intend to follow Buffett’s instruction and be greedy.
Greed
Declines in the stock market have been uneven. Some stocks – such as Halma – have fallen by around 40% since the start of 2022 (Halma’s down about 30% in the last 12 months).
Others, however, have fared better. National Grid, for example, has lost only 3.5% of its share price since the beginning of January.
There’s less fear around National Grid stock than there is around Halma. To find the best opportunities, I’m looking at shares that others are most afraid of.
Being greedy when others are fearful
One of these stocks is Rightmove. I’ve been an admirer of the company’s dominant market position, impressive capital structure, and low capital expenditures for some time. With the stock down around 15% over the last year, I’ve been buying shares for my portfolio.
Another example is Experian. The stock is trading 18% lower than it was 12 months ago. I see this as an opportunity for me to add shares in a business that is well protected from disruptive competitors.
Lastly, I’ve been adding shares in a company whose strong intangible assets impress me. Games Workshop is able to generate impressive cash flows from relatively few tangible assets. I’ve been using recession concerns to buy shares at a 44% discount to the price this time last year.
Each of these stocks has risk associated with it. Stocks haven’t been falling for no reason and a recession might bring down their profits, lowering shareholder returns as a result.
Over time, however, I think that following Buffett’s advice and being greedy when others are fearful will pay off for me. And that means looking for opportunities to make investments while others are concerned about a falling share prices.
