Being fearfully greedy: Why I buy in bear markets

I’m not a professional trader. I’m an everyday investor, like you. Why then am I buying in a bear market?

As an everyday investor, my decisions affect the quality of my life. I can spend my money on stocks and shares or I can have more fun flying to sunnier lands to go surfing, or on splurging out on a new TV. (I was supposed to be on holiday this week, although closer to home. My plan was to catch up on odd jobs around the house and finally take my new-ish Nikon D40x camera out for a spin.)

This morning though I was at my PC at 7.45am, ready for the opening of the London Stock Market. I wanted to wake to a sea of red, and I got it. I was bright-eyed and bushy-tailed, and I purchased shares in a FTSE 100 ETF when the market was at 5360. As I start typing this post, it looks a brilliant move – the market has moved 300 points higher since my buy. By the end of the day, it could seem the greatest folly, if the market reverses and crashes 10% lower.

How on Earth are you supposed to trade shares at times like these? Well, my approach at all times is to be ‘fearfully greedy’.

It may sound like something you’d hear an English child exclaim in Mary Poppins, but being fearfully greedy actually has its roots in the Omaha wisdom quoted above. And I believe it’s the only way I’ll ever get rich through investing.

Say you’re a young-ish investor like me with 30 more years of earning ahead of you, yet already holding a substantial portfolio that could have been spent instead on exciting foreign vacations and hundreds of new Sony Bravia TVs. If you’re fearfully greedy, then when markets are rising fast – as they have been doing since 2003 – you should be glad you took the plunge and invested in them.

That’s greed taken care of. (Greed is generally the easy bit…) However, you should also be afraid at all times of sudden reversals that can rob you of capital as quick as an old-fashioned street criminal cutting your purse.

In the stock market, money disappears like Tommy Cooper’s old magic props: “Just like that!” Never be complacent!

Of course, nobody is complacent when markets are falling. Yet rather than whimpering, if you’re well positioned you should be whooping with joy that you’ve got an unlooked for chance to buy the same shares you were buying last month for 10%, 20%, or even 50% less than you expected to pay. You’ll be scared, too. Your new ‘bargain’ shares could halve again in weeks in a truly vicious bear market.

The greedy bit is thinking about your future gains. The fearful bit is not overdoing it in the short-term.

Actions speak louder than 20-20 words

This isn’t just about giving yourself a pep talk. You must take actions – ahead of events – that reflect your ‘fearfully greedy’ thinking.

Say markets have risen a great deal. At the least, you might divert some of your fresh savings into cash and bonds instead of more shares. If things are looking very heady, like during the Dotcom bubble in the late 1990s or in resource stocks more recently, you ought to at least consider selling down your holdings. Not selling out, but reducing by a meaningful amount the skin you’ve got in any particular game.

I wrote briefly on asset allocation a few weeks back, and I’m glad to say I’ve been following my own advice. My bond funds have barely moved, and my soft commodity ETF is actually up 10%. But I’m not boasting I’m immune to the market turbulence. Far from it!

“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.”
– Warren Buffett, CEO of Berkshire Hathaway

The bulk of my equity holdings are in a long term High Yield Portfolio – a collection of blue chip companies that pay above average dividends – and this has been hammered in the past six months. I’ve also got foreign index trackers. The Japanese ones are down on what I put into them two or three years ago. So no, I’m not immune – I’m fearfully greedy. Which brings me on to falling markets.

Crystal balls

When global markets prices plunge in step as they have in the past 48 hours, it’s easy to feel as if the sky isn’t so much falling as already a ring around your neck. Turn on the hysterical Bloomberg or CNBC news and you’ll be buying cans of baked beans before the day is out.

So do I know the future any better than the procession of analysts they wheel out to tell us the obvious – that prices have fallen, after prices have already fallen? Of course not. I’m just one guy. But realise this, so is everyone else. There are no long-term gurus guaranteed to make a fortune out of short-term market gyrations.

There are plenty of investors who’ve amassed huge sums investing for decades throughout times of feast and famine, but there’s nobody out there who infallibly calls the short-term movements in the markets right, every single time.

What’s that? You think you know someone? That Kramer guy on TV? The hedge fund manager you read about last week? Your cousin Bob? Sorry, but I don’t think so. Bob knows no better what’s going to happen in the short-term than anyone else. It’s just that he tells you his views on the market every Thursday night, and some of the time he’s bound to be right. Those are the times you remember.

Ditto the hedge fund managers. You read about the winners who’ve been winning recently.

For example, consider John Duffield’s high-profile New Star Asset Management investment group. It was set up a few years ago, and as its name implies the company has put star managers to the fore. These are very bright investors who beat their peers in recent years, and who could thus be said to be beating the market. Yet just last week New Star revealed investors were deserting its funds in droves, that most of its managers did worse than the bulk of their rivals, and that a big push into commercial property has proven to be spectacularly ill-timed.

New Star’s share price is down over 75% in six months! The latest smart guys (and I’m certain they are super smart, incidentally) turned out to be not much smarter than anyone else, after all.

This isn’t a secret. You have to realise people have won Nobel Prizes explaining that nobody can predict short-term share price movements. The winners we all think of – Warren Buffett, David Lynch and others – invested for the long-term.

Buffett says you have to buy shares with the mindset that the market could be closed for 10 years. That’s what he thinks about his own ability to pick next year’s big gainer. Do you really know better than Buffett?

Be a brave little coward

Back to falling prices. Standing in front of a plunging market as I did this morning and squeaking out a tiny “buy!” in a torrent of (virtual) “SELL!”s feels exhilarating.

Am I some fearless market genius? Hardly. I’ve called the bottom of a market plunge when looked at over a timescale of, oh, two hours. In the grand scheme of things it’s a blip. Markets could be 20% higher in a year from here, or 20% lower by lunchtime. Who knows?

Don’t click away, thinking, “This guy doesn’t know what’s going to happen – why am I wasting my time reading?”

Yes, I don’t know, and neither do you, and neither does anyone else. That’s the point! What I do know is that when an index plunges 8% in two days and nearly 20% in three weeks, fear is in the driving seat.

I’m fearful, but I’m fearfully greedy. I don’t want to lose money, but how will I feel if prices rebound strongly? Pretty pissed off. So my greed takes over, and I have a nibble.

It’s asset allocation that makes this possible. I have plenty of cash waiting on the sidelines, and if markets hit absurdly desperate levels (I’m talking 50% or more off their all-time highs) I’d even consider selling down my bonds to buy more. Equally, if the market doubles in the next 24 months, I hope I’ll be frightened enough to sell out some of my shares to buy what will then be cheap bonds (which is easily done, as I explained in a recent article, by purchasing bond index tracking ETFs).

I can afford to take this sort of view because my investment horizon is long. Even the very worst Western stock market slumps of all-time have recovered after 20-25 years or so.

If you’re a regular investor, that’s two decades to buy shares cheaper, too. Seen like this, the young should embrace a grizzly bear market with open arms. But if you’re retired and living off your portfolio, it’s a different game altogether. You’re not going to be able to top-up your depleted equity holdings to make good losses, so you need to set your asset allocation defensively and pretty much stick to it.

Now, as I say I’m still a fairly young investor, and a retirement portfolio is currently a theoretical scenario for me. But I’d imagine my gardening-and-granchildren portfolio would comprise roughly equal splits of fixed income, inflation-proof government debt, property, bonds and equities, with the equity portion heavily biased in favour of dividend-yielding stocks to spare me from having to dip into my holdings to release the value. In other words, plenty of stuff that should give me an income and gyrate around a lot less than an index tracker.

Just as important, if you’re a young man or woman and markets seem cheap, you mustn’t give up your long-term horizons for the greedy lure of a short-term killing.

I think markets are selling out of fear right now, so I’m happy to buy knowing that I might hold the shares I acquire for decades. But I wouldn’t extend my gut feeling to punting my savings into a short-term spreadbet on the market rebounding. That kind of position can be wiped out by a day or two of further falls, and compounded by the sheer terror you’ll still feel. You could end up richer, or you could be left with no money and no hair to boot.

Sure, someone you know – probably on an Internet bulletin board – will make a fortune doing it. Some people also win the lottery, but you’d be crazy to spend all your income on lottery tickets.

Unhappy long-term returns?

Even on a 20-year horizon, if the market is cheaper in 10 years than today, it would be hard to call a decision to buy this morning a good one.

But a decision to buy shares every year or better every month, as best you can afford, is a proven wealth building strategy. When shares are cheap you get more, when they’re expensive you get less, but it roughly balances out over time.

The danger with this strategy is being spooked out of it because of short-term tactical concerns. Buying shares today might be bad move, but always avoiding shares when markets fall would be an even worse move! It’d guarantee underperformance, over the long-term. Rather, you need to average out your buying so that periods like this bear market make barely a dent in your long-term returns.

The easiest and certainly the cheapest way to do this is with long-term index tracking funds (including some overseas exposure) or via something like a blue chip, long-term buy and hold portfolio.

Sure, I buy individual company shares like any young buck, but I’ve got them in a box marked ‘My foolish, probably expensive and certainly silly hobby’. Sometimes the shares do great, tripling in a year. In 2006 one went absolutely bust.

No, the bulk of my long-term savings are allied with the Nobel prize winners and the many studies that show nearly all fund managers fail to beat index trackers. I don’t try to buck the market.

Cashing out

Incidentally, you might think cash is the place for your, erm, cash. Certainly ready money has a place in every portfolio. You get regular interest on your savings, and you don’t wake up to find half your cash gone because a bunch of city traders are running about like headless chickens. But over the very long-term, cash will almost certainly underperform the market. It’s an economic fact of life in the Western World.

Companies reflect underlying growth in the economy. If economic activity was to truly collapse to make shares completely unappealing investments, you can bet that either the interest on cash would be negligible, too, or inflation would be out of hand, destroying the real value of your savings.

In both cases, you might hang on to the nominal value of your cash, but you wouldn’t have much to brag about. And any day markets might recover, shooting up to make good their losses and dwarf your cash returns.

Japan is the best modern example of how bad things can get. The Japanese Nikkei stock market at 12,573 points is still way off the 40,000-odd points it reached in the late 1980s. Can you imagine how painful it’d feel to have invested your life savings on the day that market hit 40,000? You’d have been better to keep a chunk in cash, some in bonds and some property (though preferably not in what was then an equally crazily priced Japanese property market!) Heck, you’d have been better off putting your money under a mattress.

But while cash would have been better in hindsight than buying Japanese shares at the barmy market high of 40,000, cash returns have been pretty terrible there, too. Japan’s government even ran their economy with negative real interest rates to try and ward off deflation. For a while it looked like it might have worked, and the Nikkei had been improving in recent years on the better sentiment to head over the 18,000 point level. But Japanese investors who only bought on those recent highs will have their heads in their hands today – the market is at 12,573.

Don’t do it. Never over commit. Be fearful of going with the crowd. Drip feed your cash into shares over a period of years, and take some off the table if things get heady and you get too greedy.

Buy low. Buy low. (Did I mention, buy low?)

You have to buy when markets are down to make up for the times you will get carried away when markets are high. If the last time you invested in the US or UK market was when MyLittlePonyPark.com was trading for $1,000 a share and you don’t re-enter until, I don’t know, some nuclear fission start-up makes the Six O’Clock News in 2015 by floating for $10billion despite never having made a profit, then you will never make much money in the markets.

The safest course? Don’t trust yourself. Set up a long-term monthly savings plan into an index tracking fund, and forget about it. Whatever you do, don’t turn up on a day like today when markets are plunging and sell the lot. Go to a football match if you want to be part of a crazed crowd!

And when these recent falls are long forgotten and the market has risen 50%, get some of your holdings turned into bonds, property and cash. Even take a smidgeon out altogether and spend it on that long-postponed fancy new TV as a reward. You can’t take it with you, after all. (Remember what a worthless thing money is compared to love).

I say it again, you don’t know what will happen to prices in the short to medium-term, you can only buy with a long-term goal in mind and hope some true market destroying phenomena like nuclear war or a return to communism isn’t on the horizon.

Think the resurgence of communism would be an extreme event? I hope so too, which is why I believe one day I’ll be glad I kept on cautiously – fearfully – investing in shares for long-term gains.