MENU

Are You Ready to Take Buffett’s Advice?

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. In the USA, the S&P 500 had hit a peak of around 1,560 points back in Oct 2007 only for it to drift sharply downwards by more than 56% to 683 points in March 2009.

In Singapore, the Straits Times Index (SGX: ^STI) hit its own low of 1457 points in March 2009 from a peak of 3805 points in Oct 2007, completing a 62% plunge.

Then, let’s imagine you owned SIA Engineering Company Limited (SGX: S59) and DBS Group Holdings Limited (SGX: D05) during this tumultuous period. Each day spent looking at their share prices only made you 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 share looks undervalued with a huge margin of safety, it makes sense to buy more. Companies like SIAEC and DBS were relatively unscathed during the financial crisis as their businesses were still doing okay.

This was made evident by the corporate results of the two shares. For instance, in the 12 months ended 31 March 2009, SIAEC’s profits of S$261 million were actually 8% higher than what it earned back in March 2007. Meanwhile, DBS was still churning out good profits and even managed to hold its dividends steady through the crisis even as its Western peers had to drastically cut down on their dividends because of huge losses suffered in that period.

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’re consistently investing a certain amount of money every few months as the markets were going down, you would have been able to buy shares at low average prices. Once those shares recover, huge gains would have followed.

And somewhat not surprisingly, SIAEC is now up 327% from a low of S$1.13 to S$4.83 currently while DBS is up 255% from a low of S$4.68 to S$16.65. Both lows were seen in March 2009.

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

Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.  

The Motley Fool's purpose is to help the world invest, better. Like us on Facebook  to keep up-to-date with our latest news and articles.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by Sudhan P and first published on fool.sg. It has been edited for republishing.