Warren Buffett – Chairman and CEO of Berkshire Hathaway – is not known as one of (if not the) greatest investors of all time for nothing.
Even though he is nearly 90 years old, he has managed to build an incredible amount of wealth (currently around US$73 billion) over his long life, despite starting with not too much. Managing a 20%+ average annual rate of return is very difficult even in one year for most investors, but Buffett has managed to maintain that average for over 60.
Part of the reason he holds this incredible (and enviable) statistic is how he manages his company's capital in bear markets and crashes. See, Buffett – also known as the Oracle of Omaha – is a contrarian investor at heart, which means whatever most people are doing, he's doing the opposite.
So as markets raged towards new all-time highs throughout 2018 and 2019, Buffett sat on his hands and did nothing. Well, nothing except watch his pile of cash grow to more than US$120 billion. It was exactly what he was doing in 2006 and 2007 – and before that 1998 and 1999.
But in 2002, 2008 and probably right now, Buffett was pulling out the chequebook and putting that pile of patient cash to work, just as most investors were fleeing to the hills with nasty losses locked in. Many of his most successful purchases were made when things seemed darkest, you know, just before the dawn.
And that's the lesson I think every investor should be taking to heart right now: don't follow the crowd, and don't start buying or selling when things get too exciting or too scary. Emotions are a wonderful part of life, but they have no place in the cold, hard world of investing.
Many investors will tell you they know this, but still let their greed or fear run away with them when feet get close to flame.
So as you're wondering how your portfolio will ever recover, or whether we've 'found the bottom', remember the bigger picture. Remember why Buffett loves buying stocks when no one else wants to own them, and why he seems to outperform everyone over the long-term.
Most investors get average returns because they do things average investors do… like sell stocks when someone offers them a ridiculously low price. Or waiting until a far worse deal comes along before buying them back. So don't be average, try and be like Buffett! Even if you don't live up to his reputation, you'll probably be a lot better off than the average investor!
