The recent market crash may leave many investors feeling conflicted about whether now is the right time to buy stocks. You may be concerned about the prospect of things getting worse before they improve. Therefore, you may wonder whether it is a good idea to adopt a "wait and see" approach to investing.
At the same time, you may be concerned about missing out on a stock market recovery. The S&P 500 has gained 18% in the past eight trading sessions, so further gains could reduce the range of buying opportunities available to investors after the stock market’s recent decline.
Improving economic prospects
According to Warren Buffett (Trades, Portfolio), you should not wait for an improvement in the economic outlook before buying stocks. In his 2008 investment letter to Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) shareholders, the Oracle of Omaha said:
“We are certain, for example, that the economy will be in shambles throughout 2009 – and probably well beyond – but that conclusion does not tell us whether the market will rise or fall”.
Indeed, the economy has usually lagged the performance of the stock market. Waiting for economic indicators such as jobs numbers, gross domestic product growth and consumer confidence to improve may mean it is too late to buy stocks while they offer wide margins of safety. In waiting for an economic recovery, investors run the risk of missing out on a sizeable proportion of its gains.
This proved to be the case in 2009, when the U.S. economy contracted by 2.8%. This was its first recession since 1991, and yet Buffett proved to be correct:
“The Dow closed the day of the letter at 7,063 and finished the year at 10,428.”
Investors who were waiting for the economy to show signs of improvement missed out on over 50% of gains in a matter of months.
Improving investor sentiment
Another factor which many investors are focusing on at the moment is market sentiment. Data such as the VIX index provides guidance on the level of confidence, or fear, among investors. It surged to an 11-year high in March and has remained at elevated levels even during the S&P 500’s recent rally.
According to Buffett, waiting for your peers to become more positive about the outlook for stocks can be detrimental to your performance. He noted in his 1994 letter:
“Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist”.
This highlights Buffett’s willingness to ignore his peers and invest during periods where volatility is likely to be high. Although this can lead to losses in the short term, over the long run it can be a logical method to capitalize on low valuations across the market.
A simple solution
Rather than trying to time the market, buying high-quality businesses during periods of stock price weakness could be a simple solution that improves your portfolio’s long-term prospects. As Buffett highlighted in his 1994 letter to Berkshire Hathaway shareholders:
“Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%”.
Despite all of those unknowns, the S&P 500 has reported an annualized total return of over 10% in the past 50 years. Investors may be better off acknowledging the difficulties in trying to second-guess the market’s movements, and instead seek to build a portfolio of strong businesses for the long term while they trade at low prices.
Disclosure: The author has no position in any stocks mentioned.
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