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Are You Ready To Take Buffett’s Advice?

Warren Buffett Let’s all imagine we are now in September 2008 and Lehman Brothers just filed for bankruptcy. The Wall Street Journal front page headline screams, “Crisis on Wall Street as Lehman totters”. A few days later, the headline reads, “Bailout Plan Rejected, Markets Plunge, Forcing New Scramble to Solve Crisis”.

Meanwhile, the stock market is literally crumbling like a pack of cards. The Straits Times Index (SGX: ^STI) hit a low of 1457 points in March 2009 from a peak of 3805 points in Oct 2007, plunging 62% from its peak.

Then, let’s imagine you own SIA Engineering Company Limited (SGX: S59) and DBS Group Holdings Limited (SGX: D05) during this tumultuous period. Every day you look at the stock market, you get more and more depressed. The charts of your companies are on a downward spiral.

What would you have done?

Warren Buffett once said that we should be greedy when others are fearful and be fearful when others are greedy. If you believe in the business and if the stocks are undervalued with a huge margin of safety, it makes sense to buy more of the stocks. Companies like SIAEC and DBS were relatively unscathed during the financial crisis as their businesses were still ongoing. Planes still had to be maintained before flying off and DBS was well-capitalised.

Historically, stock markets have gone up more in percentage terms than it has gone down. Also, bull markets have lasted longer than bear markets. So, if you invest a certain amount every few months consistently as the markets were going down, you would have gotten stocks at an average low price. Once the stocks recover, you would be sitting on some huge gains.

Not surprisingly, SIAEC is now up 342% from a low of $1.13 and DBS is up 250% from a low of $4.68. Both lows were seen in March 2009.

So, the next time a huge bear comes and the front page of the newspapers screams, “Wall Street on the Brink of Collapse”, are you ready to be greedy when others are fearful?

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.  Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.