Investors with cash to invest will be greedily poring over the cut-price shares in the FTSE 100. The UK index has crashed 26% from nearly 7,500 to 5,500. It has fallen to an eight-year low in just a couple of weeks.
Stock markets have witnessed some of the steepest price drops in a generation. It’s a time of extraordinary panic and fear.
But with panic and fear comes opportunity. It may be difficult to channel your inner Warren Buffett at times like this. But note that the greatest value investors in history all say the same thing.
Back to basics
Sir John Templeton, arguably the greatest stock picker of the 20th century, said: “The time of maximum pessimism is the time to buy, and the time of maximum optimism is the time to sell.”
He added: “If you want to have a better performance than the crowd, you must do things differently from the crowd.” On the eve of World War II in 1939, investors were fleeing stock markets. That is when Templeton decided to buy. His portfolio returned 400% over the next four years.
Templeton was following Benjamin Graham’s lead. Graham is the original father of value investing and Warren Buffett’s mentor. His 1949 book The Intelligent Investor was a great source of inspiration to me and you should read it too. Graham said: “Buy when most investors, even experts, are pessimistic. And sell when everyone is optimistic.”
To take this approach requires courage. And the knowledge that your moves may not play out immediately. But they will bear fruit over the long term.
In my opinion the FTSE 100 and world stock markets have much further to fall. We’re not at maximum pessimism yet.
From £10K to £400K
The difference between an average return from the stock market and a good one is stark. Using the accounting tool known as the Rule of 72, we can work out that a portfolio returning 10% a year will double your money every 7.2 years, requiring absolutely zero work or extra capital invested.
If you are around 40 years old today, that gives you four periods of doubling before you retire, turning £10,000 into £20,000, then £40,000, then £80,000.
But the magic of compound gains means any extra additions will impact hugely on your final total. Leave £10,000 in a Stocks and Shares ISA or SIPP returning 10% and never look at it again, that’s fine.
But add £200 a month to your initial £10,000 investment and at 10% return something rather magical happens. At the end of your fourth doubling period, your total is not £80,000 but £354,000.
Even a portfolio returning a much lower rate of 5% a year, with the couple of hundred pounds a month added would give you £159,000 at the end of 28 years.
As I’ve written elsewhere I’m not buying yet. As the FTSE 100 crashes I’m stockpiling cash, building a solid watchlist and waiting.
But taking the long view is what will really make your gains spectacular.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.