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Buffet and Bear Markets.

October 20th, 2008 · Greg Atkinson · No Comments

Recently a lot of coverage has been given in the media and on various websites about the news that apparently Warren Buffet is buying U.S stocks again. It has been reported that the worlds most successful investor recently said  “A simple rule dictates my buying: be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”

What Buffet says make a lot of sense, but actually following his advice takes a fair bit of courage. When the Australian All Ordinaries Index went below 5000 in around March this year I started some selective buying and I would guess readers of this blog probably think I need to have my head examined.

However the reason for my apparent madness was that the average bear market drop over the last 20 years has resulted in the Australian All Ordinaries falling around 22%, and in March we reached that point. (i.e. the All Ords were down around 22% from their 2007 highs)

So I figured it was not a bad time to pick up some bargains and when the Index touched 6000 again in May, I was starting to think I had made some pretty smart stock purchases. But as we know now, the All Ordinaries drifted back down to 5000 and then in recent weeks it collapsed around another 1000 points.

I was in short, trying to follow Buffet’s advice and was nibbling at the market when it seemed everyone else was getting out of stocks. In hindsight I moved a little too early, however I have recently started buying shares again in companies like Brambles (BXB) and Wesfarmers (WES) because I hope the latest wave of selling was just pure panic.

Of course only time will tell if I have made the right decision and I may wish I had just left all my money sitting in a nice warm government guaranteed bank account.

The experts they will tell you that a bear market sets up the next bull market and in Australia’s case I believe, it has taken an average of 15 months for the market to get back to it’s post bear market highs after reaching the bear market bottom. So if we assume we are finally around the bottom now, then we are looking at around December 2009 before the All Ordinaries will breach 6500 again if the market takes the “average” time to recover value.

But to get back to that level we would need to the market to gain around 60%, so potentially there are some large potential gains to be made for investors. However if the market falls further then of course there will be more losses and it may take longer for our portfolio’s to recover.

It is dangerous to assume anything at the best of times and especially at the moment with the way the markets are, but I hope now with Warren Buffet in buying mood that we may yet see the end of this horrid bear market and dare to dream that by the end of 2009, we will be back somewhere near the 2007 highs.


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