“Be fearful when others are greedy and greedy when others are fearful.” – Warren Buffett
Fear breeds volatility and volatility depends on fear. Both are temporary. Keeping your emotions in check during times of fear and volatility is how you avoid big stock market losses.
The quote above comes from Warren Buffett. The financial crisis of 2008-2009 gave him a perfect opportunity to follow his own advice.
At the depths of the financial crisis and stock market collapse, Buffett and his Berkshire Hathaway (NYSE: BRK.B) made several investments that have proven to be incredibly lucrative – greed at a time of fear.
In addition to buying shares of companies he already owned and liked, Buffett invested more than $70 billion in six companies at the height of the financial crisis. These investments had already rewarded him with more than $10 billion in profit by late 2013 and have continued to reward him since.
Fear and an Epidemic
Here’s an example of investors being greedy when everyone else was being greedy.
Travel back in your mind to October 2014, the height of Ebola fears in the stock market. Though the Ebola crisis was having a small impact on the market as a whole, it was having a much more significant impact on shares of companies based in Africa, companies that conducted a significant portion of their business in Africa and also companies poised to profit from the Ebola outbreak.
In the latter category there are two companies that I wrote about on Oct. 14, which turned out to be the beginning of the end for Ebola stock peaks.
The two companies are Lakeland Industries (NASDAQ: LAKE) and Alpha Pro Tech (NYSE: APT). Among other products, these two companies manufacture “protective apparel” such as face shields, gloves and hazmat suits. It is this last product that had markets so excited.
In just the first 13 days of October, shares of Lakeland and APT surged 317% and 209% respectively. The next day I wrote about the incredible surge of these stocks, advising that “I have a hard time getting behind stocks that have risen this much this fast.”
Sure enough, Oct. 13 marked the peak for these two Ebola stocks.
Lakeland and APT both fell around 26% the next day. Lakeland is now down 64.7% from its October peak and APT is down 74%. Those who bought at or near the top got burned and burned quickly – by the first of November the stocks were already down from peaks by 51% and 66% respectively.
Quality at Rock-Bottom Prices
What’s the lesson here?
The logic of someone buying these two Ebola stocks must have been that, with one-time use hazmat suits integral to fighting the Ebola virus, the companies were worth buying at any price since there was no end in sight to the Ebola virus.
The problem is that the companies’ production capabilities hadn’t increased, the CDC and other agencies were already getting Ebola under control and the meaningful spikes in both stocks were the result of news headlines not material information on demand, the distribution contracts or anything else tied to the performance of the companies.
That’s the difference between buying these Ebola stocks after they had risen 300% and 200% in weeks and Warren Buffett buying shares of quality companies at rock-bottom prices.
Fear tends to be temporary and understanding this is an important way to avoid big stock market losses.
Whereas Warren Buffett was greedy when others were fearful, speculators buying shares of Ebola stocks at the height of Ebola fears were greedy when others were being greedy.
Making Warren Buffett Green
Since 2010, mega-investor Warren Buffett grew his wealth by an average of nearly 14% each year. Yet over this same period, a small group of investors nearly doubled these returns…tripling their wealth in the process. How? Just by investing in a select group of stocks with one thing in common. Those who understand it can experience life-changing growth.