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Investor alert! Why wasn’t Warren Buffett greedy when others were fearful?

When world stock markets tanked in February/March, investment scribblers like me were quick to roll out the wisdom of master investor Warren Buffett on taking advantage of market crashes. “Be greedy when others are fearful”, we reminded readers. “When it rains gold, put out the bucket, not the thimble”. And so on.

It came as a shock, then, to discover Buffett hadn’t filled his bucket in the first quarter crash. Indeed, he’d actually sold some of his shares. Here, I’ll discuss why he wasn’t greedy when others were fearful. And what it means for ordinary investors like us.

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Warren Buffett and cash

“It gives me pause for thought when investors I have a great deal of respect for are saying or doing things that don’t quite tally with my own philosophy”. I first wrote these words in an article back in December. It was about the enormous cash pile Buffett had accumulated. I’ll give you a quick recap, as it provides a useful lead-in for looking at why he wasn’t greedy in Q1.

Last year, Buffett told his shareholders: “Prices are sky-high for businesses possessing decent long-term prospects”. And I suggested it was no coincidence his cash pile had increased to record levels in lock-step with one of his favourite yardsticks of US stock market overvaluation.

The market’s capitalization as a percentage of gross domestic product had surpassed 150% in recent years. This measure has averaged 89% since 1975, with previous peaks of 146% at the height of the dot-com bubble in 2000, and 137% ahead of the financial crisis in 2007. As such, the ‘Buffett ratio’ of market overvaluation was at an unprecedented high going into 2020.

Warren Buffett and the Q1 crash

The Buffett ratio fell from 155% ahead of the Q1 crash to a March low of around 115%. It’s risen rapidly since, and is now near the dot-com-bubble level of 146%. The window of opportunity to be greedy was narrow. Furthermore, the low of 115% in March was hardly screaming the market was a bargain. The ratio went below 75% following the dot-com bust, and to around 50% in the lows of the financial crisis.

On past occasions companies had gone begging to Buffett for capital. And he’d been able to cherry-pick terrific discount deals. In March this year, he began to get some approaches. However, this time round, his usual game didn’t play out. This was because of the Federal Reserve’s rapid and massive backstopping of the US economy and markets.

Equity prices had already bounced back significantly by the time Buffett addressed his shareholders on the first weekend in May. He told them that despite being in a position “to buy a $30-50bn company on Monday morning,” he didn’t “see anything that attractive”.

Ordinary investors like us

Despite the uncertainty caused by Covid-19, and the ultimate outcome of the Fed’s response, Buffett maintains the best thing for investors to do is “bet on America and sustain that position for decades”. He recommends an S&P 500 index fund for most investors.

In the UK, the Covid-19 crisis and Bank of England response have been similar to that of the US. And I think the advice for UK investors is also similar. A FTSE 100 tracker may suit many. However, if, like me, you favour owning individual stocks, you’ll find plenty of analysis here on the Motley Fool website.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.