‘Be fearful when others are greedy, and be greedy when others are fearful.’
This investment ‘rule’ seems timely for so many reasons, but none more so than the fact that it was made in 2008 by legendary investor Warren Buffett who yesterday hosted the annual shareholders’ meeting of his successful company Berkshire Hathaway in Los Angeles.
Tens of thousands of Buffett aficionados watched the AGM via a live online stream as the Sage of Omaha and his trusty lieutenant Charlie Munger gave their views on markets, the US economy, corporate governance and a lot more besides.
Inspiration: Legendary investor Warren Buffett, dubbed the Sage of Omaha
Buffett, 90, is renowned for his investment sayings, many of which are now embedded in good investment practice: ‘Just buy something for less than it’s worth’ (don’t buy a stock unless you think it’s undervalued).
And: ‘Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down’ (price dips are an opportunity to increase your stake in a company).
The one relating to fear and greed is based on the fact that it often pays investors to be contrarian.
In other words, they should be cautious about buying a company’s shares when prices are going through the roof because they could end up overpaying.
Equally, they should be brave when others are fearful because it could provide a good buying opportunity.
The saying applies as much to stock markets as it does to individual shares – sell when markets look expensive and buy after a fall.
Ahead of Berkshire Hathaway’s AGM, I was reminded of Buffett’s words by reader Ian Parkinson from Liverpool. He contacted me seven days ago to thank me for some wealth advice I imparted in the teeth of the coronavirus storm in March last year.
Advice – namely be greedy when others are fearful – that has added considerable sparkle to his investment portfolio.
Ian, who runs his own business repairing damaged car upholstery and broken air conditioning systems, acted on an article I wrote on March 22 last year – a day before the country went into lockdown.
It was written after stock markets – not just here but across the world – had fallen by more than 30 per cent in just a month as fears of a global pandemic mounted.
The piece had two investment messages.
First, I implored investors to tough out the stock market storm. Secondly, heeding the words of Buffett, I suggested that investors should look to invest in some of the country’s most robust investment trusts.
These stock market listed investments, I argued, offered investors a number of soothing reassurances. First, their longevity – many of them have been around for a long time and have survived all kinds of market scares (worse ones than those experienced in March 2020).
Secondly, they tend to have low management charges which do not eat significantly into investor returns – or exaggerate losses.
Thirdly, they are broadly invested, either in a diversified portfolio of UK or international shares.
Fourthly, they have a fine record of prudently managing the income they receive from their investments – and which ultimately they pass on to shareholders by way of dividends.
By not paying out all the income they receive – instead tucking some of it away in reserve – they are able to build an income defence fund which they can use to top up payments to shareholders when things get tough.
And finally, many investment trust shares were battered – cheap as chips.
The 13 trusts I suggested (see table) were all supported by at least a year’s worth of dividend income in reserve and a minimum 20 years of dividend growth behind them.
Ian, 58, decided to invest £1,000 in each of the 13 through his Fidelity Isa. ‘I had some spare money,’ says Ian, who is married to 56-year-old Gwen, an administrator in the National Health Service.
‘I could have frittered it away, but I decided to invest instead. I’ve got one eye on retirement and although I have a healthy pension from my days at Royal Mail to look forward to, it’s nice to have other sources of retirement finance available.’
Ian’s investment boldness has served him well. As the table shows, the £13,000 he has invested has grown to around £22,665 – an investment return of more than 70 per cent (slightly less after Fidelity’s platform charges and the fact he has not automatically reinvested all the income he has received).
Not surprisingly, he’s delighted. ‘Thanks. If it hadn’t been for your article, I would have probably ended up keeping the money in the bank.’
Financial analyst Laith Khalaf, of wealth platform AJ Bell, is impressed with the investment acumen Ian has shown.
He says: ‘Buying into falling markets is one of the hardest things to do because fear is contagious. But if you keep a level head, which is paramount, it can pay handsomely as Ian has proved.’
Ian accepts that the investment returns he has earned since March last year are unlikely to be matched over the next year.
But he’s content to hold on to his trusts. Of the 13, only Temple Bar has reduced its annual dividend payments although this has been more than compensated for by strong share price gains.
Most of the remaining 12 have reduced their income reserves to support shareholder dividends although nine still have enough income in their tanks to pay at least the equivalent of last year’s dividend – a reassuring fact.
Over the last ten years, the average investment trust has generated a return of 189 per cent.
Khalaf says shares, especially those in the US, are no longer in ‘cheap territory’. He adds: ‘The big bounce from the market lows of last year is in the rear-view mirror, so returns from here on can be expected to be slower.’
But he believes there is little scope for bad news this year unless vaccines don’t prove as effective as expected.
His final bit of advice? Set up a savings plan which invests your money in the market every month. ‘Doing so makes for a smoother journey,’ he says, ‘and takes all the angst out of timing an investment.’
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.