Last week, CNBC’s Jim Cramer trotted out Warren Buffett’s well-known advice to be greedy in the stock market when others are fearful and fearful when they are greedy.
In other words, if everyone’s mad about shares and valuations are high, Buffett tends to avoid buying. But when the market’s in panic mode, such as right now, Buffett tends to find good-quality companies selling at modest valuations and he fills his boots with their shares.
Not an exact science
However, as Cramer pointed out, Buffett’s approach isn’t an exact science. For example, on 6 October 2008 in the middle of the bear market, Buffett had an article published in the New York Times. Essentially, that piece said he was in the market and buying stocks. But the Dow Jones Industrial Average plunged a further 25% after that.
Indeed, timing the market is difficult, and even investment greats such as Buffett don’t try to do it. He’s known for making his purchases based on his perception of the value he’s getting for his money and not because of the absolute level of a share price.
And he’s doing very well with that investing strategy. Indeed, according to FactSet, the Dow rose by just over 300% in the years following his call to invest. Despite first falling a bit, it seems he was right to buy into the weak stock market back then.
Nuanced advice from Cramer
Meanwhile, Jim Cramer is making a similar call today. His starting point is that he thinks the stock market will eventually continue its upward trajectory following the coronavirus turbulence, regardless of how long the volatility lasts. However, the one-time hedge fund manager’s advice is a little more nuanced than Buffett’s simple ‘buy stocks’ call of 2008.
Cramer believes cash is king, for example. By citing the Buffett example, he’s underlined how difficult it is to guess where the bottom of the market might be. So he recommends buying on the way down by investing money in parts. And then we’ve got to tough it out through the inevitable near-term gyrations in the markets. But the prize will be delayed gratification as markets ‘normalise’ later, he reckons.
He detracts from Buffett’s ultra-long-term approach of today by saying: “If you want to sell some stock in the next bounce, and there will be a next bounce like we had [last Wednesday], you have my blessing.” I reckon such an approach shouldn’t be anathema to long-term investors. It’s worth remembering that Buffett himself made his first million or so in the stock market with a shorter-term trading strategy. Indeed, he bought good value when he saw it and sold out quickly when the value had been ‘outed’, or simply because he saw even better value elsewhere, or because he had big profits and wanted to crystallise them.
I think drip-feeding money into the markets is a good idea. But let’s be careful and pragmatic about how we do that. Cramer said: “While I don’t actually think that we’re all that close [to a bottom] if things keep getting bad, I also don’t want to wait too long to put that cash to work.” I’ll leave you with that thought.