Really smart investors tend to have their own unique style. But dumb ones are all the same. They tend to be ignorant of stock market history. And they act - or, more to the point, react - not rationally but emotionally.
This article published with permission from InvestmentU.com.
In a minute, I'll tell you what the world's smartest investor is doing right now.
But let me start by giving you a hint: It's the opposite of what the dumbest investors are doing.
Really smart investors tend to have their own unique style. But dumb ones are all the same.
They tend to be ignorant of stock market history. And they act - or, more to the point, react - not rationally but emotionally. (They don't realize they're acting emotionally, of course, because they always rationalize that what they're doing is sensible.)
We've Seen This Before
Let's look back at the recent financial crisis for a few examples.
The worst investors panicked and sold somewhere near the bottom. In fact, many of them only just recently picked up the nerve to get back into stocks. In other words, having missed almost the entire rally, they are now enduring the correction.
They haven't sold out yet because stocks haven't fallen so far that they can't sleep at night. To be a terrible investor, you have to wait until fear and pessimism are rampant and stocks are somewhere near the bottom.
Average investors, on the other hand, spent the financial crisis acting like deer in the headlights. They didn't sell but they couldn't bring themselves to buy anything either. If they kept reinvesting their stock and bond distributions, however, they came out ahead as a result of the market's belly flop.
But the best investors know that every serious market sell-off is a buying opportunity. They spent the financial crisis looking for great companies selling at fire-sale prices. And there were thousands of them.
Sure, they might have bought a little early and seen their shares take an initial drop. But they used this additional sell-off to reduce their average costs further still.
In sum, the financial crisis was a boon to the average investor who at least reinvested his dividends - and a godsend to the smart ones who capitalized on one of the great buying opportunities of our lifetimes.
It was only a disaster for the emotional ones who panicked and sold, perhaps egged on by some doomish guru proclaiming that the end was nigh.
What's Warren Doing?
As the financial crisis unfolded, the world's smartest investor - Warren Buffett - wrote an op-ed piece in The New York Times that told the whole world what he was doing. It was titled "Buy American. I Am." He said:
"Let me be clear on one point: 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."
He put billions to work buying great companies at bargain prices. And he is doing the same thing today.
In a recent CNBC interview, he declared that he is a buyer of stocks, adding, "the more the market goes down, the more I like to buy."
You might think that when the worst investors discover what the world's smartest investor is doing, they do the same thing.
But they don't. History is clear on this.
They're too nervous to buy. So they hold. They hold until they simply can't bear to look at their stock portfolios any more. Then - just as surely as the sun rises in the east - they will sell.
Who says no one rings a bell at the bottom?
Alexander Green is the chief investment strategist at InvestmentU.com. The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.