“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful,” said Buffett. “And most certainly, fear is now widespread, gripping even seasoned investors.”
This is the basic rule that Warrent Buffett explained on a video interview and that an article from CNN explains a little bit further.
Basically, before the crisis exploded, Warren Buffett had invested his money almost entirely in Treasury Bonds, which is almost like having all his money in cash with a protection for inflation. But now that many stock’s have lost more than 30% of their value, Warren is switching his entire porfolio to U.S. stocks . He is now using his huge savings to buy cheap stocks.
He is investing on these companies not because he is just a good guy that wants to help them. He is investing because he knows that these companies have strong potential for future growth and now that their prices are very low it is the moment to buy.
This is like buying a house from somenone that is in financial trouble and is desperate to sell, causing that these guys sell their houses for a fraction of what they are really worth.
This reminds me of the old fable from Aesop “The Ant and the Grasshopper” and it couldn’t be more true. Obviously, while the rest of people where enjoying the boom of the stock and house markets, he was getting stronger in his cash position via saving in Treasury bonds, and then when the “winter” came in, he is now ready to use his cash to buy the leftovers of the “grasshoppers” at bargain prices.
While it sounds like a simple rule to follow, in reality it is hard to tell whether we are at the top or the bottom of a market. It’s difficult as economic cycles are never the same and some might last longer. In the case of Mexico’s economy, the last time we had a financial crisis was in late 1994 and now we are again at the brink of another one in late 2008, that is 14 years distance, and we went through smaller economic cycles in between.
This is my first financial crisis in my adult life and as a head of family, while I still have memories from the last crisis, it’s not the same now, as now I have duties that I didn’t have before. But I’m sure we all will learn valualble and painful lessons from this crisis that now has a global reach.
Tags: Aesop, Economy, Financial Crisis, Warren Buffett
