Long Term Investors vs. Bear Market Rally?

On October 15, 2008 the S&P500 closed at 907.84 (down over 41% from 12 months earlier), and the following day Warren E. Buffett posted an op-ed piece in the New York Times telling everyone he was buying stocks in his personal account. Considering Buffett is one of the greatest equity investors in U.S. History, this is relevant information to me because we’re roughly at the same level in the S&P500 now, we’re experiencing one heck of a stock market rally over the last 2 months (up 37%), and many investors are confounded trying to determine if the recent rally has been a been a bear-market-rally that will quickly fade or if the markets are safe again and it’s time to get long.

Without question, many things have changed since October 15, 2008, but also many things have not changed. Our current market conundrum reminds me of two Buffett quotes:

1) “Be fearful when others are greedy, and be greedy when others are fearful.”

2) “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.”

The first quote was Buffett’s argument for why October 15, 2008 was a good time to buy stocks. Considering the market is now at roughly the same level, it seems now is still a good time to buy stocks for the long-term. Granted, a lot has changed in the market, but a lot is still the same, and Buffett is a genius investor with an amazing track record.

The second quote seems to suggest that long term investors shouldn’t trouble themselves trying to determine if the recent stock market rally is a bear-market-rally or not, but rather now is still a great time to invest for the long term. I certainly wouldn’t drop my entire life savings into the stock market all at once, but I think now is still a great time to increase your long term exposure to equities.

Comments

[Van.TH:]

I don't bother with the current up and down either. Simply one can't predict the next move of the market. Yet, I believe we will come back better time (than last couple quarters).

May 11 07:14 AM

[Buy and Hol...:]

I think that people should always be fully invested, especially if you take an approach like Buffett's. He's willing to wait five, ten years for his stocks to appreciate.

If you're willing to do that, you'll be fine.

If you don't have as much patience, then there are other things you can do. You can use covered calls, buy stocks before their ex-dividend date and then sell them afterwards, and engage in merger arbitrage.

May 11 08:03 AM

[Richard M:]

These buy and hold statements by Van Th and Buy and Hold Plus borders on blind stupidity. Anyone who has followed this advice has lost a large piece of their wealth that they may NEVER recover. Study the markets. Learn to step aside when things turn against you. Learn how to do this. Study, study, study. I have done this and made a small fortune dure the past few years. Yes it can be done and don't let these buy and hold fools convince you otherwise.

May 11 08:45 AM

[AndrewBaker:]

Horses for courses: many people will be natural buy and hold investors because they don't like stress, don't feel able to evaluate stocks on a shorter term basis, have little interest other than stocks being long-term savings vehicles or for any number of other reasons. Others will want to enhance returns by trading, which means taking a view on prices on a monthly, weekly or even daily basis.

If you are category 1 above, then buy now, and you won't mind too much when a drop comes and you find you could have bought for less. If you fall into category 2, then sell into this rally and conserve cash for buying after the next drop. You want even want to short some stocks, sectors, or indices maybe.

Either way, good luck.

May 11 08:51 AM

[robert.b.fe...:]

Ilike many others do a bit of both. Day trading takes up way too much time and requires a tight focus that I can't afford. Therefore I purchase stocks with the intent of holding them for at least a year. Some I have had for many years consisting of dividend paying stocks like MET and PFG which I will hold indefinitely. Others will be held until they reach thier target and then they will be sold at the decline. There are bargains to be had now so do your due dilligence and happy humting.

May 11 09:46 AM

[retired avi...:]

I share the author's sentiments - except that Buffett is not ONE of the greatest investors, he is THE greatest investor. He's never drawn a salary over $100k or so and parlayed just a few thousand dollars in the 1950's into being the richest individual in the world (depending on BRK-A share value on the date you measure).

Today's stock price levels, despite the big rally, are still not factoring in any recovery, EVER. Of course debt levels are unprecedented and the negative spiral could go on for years, but there will be a recovery of GDP growth and profitability - I don't see a Japanese lost 2 decades.

May 11 09:47 AM

[Crude Oil T...:]

Sadly, only retail traders are being suckered into buying for the long term right now. Some commercial, profession traders will move back in at 800 on the S and P. But even then could be early.

May 11 01:41 PM