What I have learned from my investment experience over the past few months is that public opinion poll is no substitute for thought; sentiment is always trumped by fundamentals. In my October editorial, I expressed an investment strategy -- namely, being fearful when others are greedy and greedy when others are fearful -- which had worked brilliantly for me and others in previous cycles. It was a simple principle that has resulted in profits well beyond my wildest dreams, but this time the strategy ended up being more of an act of a simpleton! Buying the dip, at least at the level that I identified as providing me (and Berkshire) with value, proved wildly unsuccessful against the backdrop of a Black Swan event in equities. With the benefit of hindsight, this time the fear on the part of seasoned and unseasoned investors had validity and the economic damage incurred over the past six months will have a lasting impact.
Let me be clear on one point: I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month -- or a year -- from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
My October entry point in buying stocks was poor. I failed to consider what I had previously written in the past about market timing and investment strategy. Firstly, "Don't try to catch a falling knife until you have a handle on the risk." Secondly, I paid too high a price for the value I received in buying stocks and the degree in which I went all-in is another example that I should have practiced what I preached (and wrote!) -- that is, "short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children." Thirdly, I forgot my first rule of investing, which is "not to lose", and I also forgot the second rule, which is "not to forget the first rule."
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30%. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price.
It is clearly different this time. I should have heeded my advice that "if past history was all there was to the game, the richest people would be librarians." I should have paid attention to my Depression reference because there is a growing risk that the current economic downturn might morph into just that! In the past, stocks have anticipated an economic upturn in advance; in this cycle, stocks may not respond positively until it is clear that public policy has gotten traction and is reflected in better visibility of economic stabilization/recovery.
Over the long term, the stock market news will be good. In the twentieth century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.