The S&P500 is down 22% year-to-date, at the time of this writing – one of the worst one-year performances in many investors’ lives. Returns in 2008 were worse, with stocks falling 38% that year. But returns in 2022 are comparable to those of 2002, which was the second-worst year for stocks in the last 47 years.
Investors love a good quote from the excellent Warren Buffett. Many default to his pithy phrase, “Be fearful when others are greedy and be greedy only when others are fearful.” But what if I said that in 2002, when stocks were down 23% and down for the third year in a row, Buffett didn’t take his own greedy advice?
It’s true. At the time, Buffett said he had an “aversion” to buying stocks and therefore bought very little. This may shock some and discourage others. But either way, I believe Buffett’s words from 20 years ago offer a timely perspective for today’s bear market investor.
Hungry for actions or aversion to them?
There is a common thread between Buffett’s words about fear and greed in 1986 and his aversion to stocks in 2002. In both cases, Buffett was teaching a valuable lesson in how to value a stock – a lesson that is, unfortunately, often missed.
In his letter to Berkshire Hathaway shareholders in 1986, Buffett called fear and greed two diseases that break out and spread unpredictably. The disease of fear leads to massive sell-offs that cause stocks to be undervalued. And the disease of greed leads to spikes that cause stocks to be overvalued.
However, Buffett’s ultimate goal was not greedily buying stocks whenever they are falling – this is reactive behavior based on price movements in the market. Rather, he continued to objectively value stocks based on their business prospects, immune to the two “diseases” that plague Wall Street. As he went on to write, “stocks cannot outperform companies forever.”
Fast forward to 2002, the S&P 500 ended the year down 23% after falling 10% and 13% in 2000 and 2001, respectively. This three-year bear market resulted in a whopping 49% decline from the market peak. However, in his 2002 letter to Berkshire Hathaway shareholders (which was written in February 2003), Buffett said, “We continue to take little action.” Sounds almost scary – not greedy – does it?
Again, Buffett’s main concern was not how far down stocks were from their highs, but rather whether those companies were undervalued or overvalued. He would go on to write in 2002: “The aversion to stocks that Charlie [Munger] and I expose today is far from being congenital. We like to own common stock – if it can be bought at attractive prices.”
The risk of misinterpreting Buffett
Many have taken Buffett’s words about fear and greed to mean you should just buy stocks whenever they’re down. As my buddy (who has never bought stocks in his life) told me earlier this week, “Now is the time to buy”. For this reason, many investors – diligently attempting to emulate Buffett’s success – continue to buy stocks in this bear market. Ratings are an afterthought.
Don’t get me wrong: I am not arguing for the hoarding of money necessarily. I myself have been a bear market buyer. Two stocks I bought aggressively in 2022 are cobblers Crocodile (CROX -1.66%) and Focus on video communications (ZM -0.46%).
For Crocs, its revenue is growing and growth could accelerate due to its recent acquisition of Heydude. Additionally, the company is profitable and trades at a steep discount to the market average. And finally, management has so far adequately managed the challenges of inflation, which gives me hope that its profit margins will largely hold up in this environment.
For Zoom, investors fear its best days have returned during the worst of the COVID-19 pandemic and its business will slowly decline from here. But its remaining performance obligations (RPOs) tell a different story. Zoom’s RPO is at an all-time high of $3.2 billion as companies continue to find the company’s services valuable and increase the number of Zoom products they use, which is why I’m Always Ready to buy this stock.
But to reiterate, I’m not greedily buying shares of Crocs and Zoom just because they’re 56% and 86% below their respective all-time highs. That would be a misapplication of Buffett’s sage advice. On the contrary, I believe I am getting an “attractive price” for these stocks today, given my expected holding period of over five years.
The takeaway for investors is this: whether stocks are up or down, always look to pay a fair price based on the Company of the stock you buy. Fixating on price movements can distract you from this important principle of investing.
Jon Quast holds positions at Crocs and Zoom Video Communications. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares) and Zoom Video Communications. The Motley Fool recommends Crocs and recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short put options in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
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