Bucking The Herd

Two of the greatest minds to ever invest in the markets Warren Buffett and the late Sir John Templeton differed immensely in their personal styles, but agreed wholeheartedly in their approach to investing. Both strongly eschew the herd mentality, believing that you can never beat the herd by following it.

Buffett, of course, is well known for his rather blunt opinion of running with the bulls: “Be fearful when others are greedy, he says. “And greedy only when others are fearful.” Similarly, Sir John was famous for cautioning investors to sell at the moment of maximum risk and buy at the point of maximum opportunity. He believed in paying close attention to the market’s emotional continuum before investing. Chart A often causes an eureka moment for many new or reluctant investors. Entitled The Cycle of Market Emotions, it pertains to timing or mistiming the markets based on the herd’s emotional pitch at any given time; and is spot-on relative to today’s real estate and financial markets.

When investors are driven by euphoria, as was so brutally exemplified by the dot.com boom (and bust) and by the more recent housing bubble (and burst), everyone wanted to gallop with the herd which instead as hindsight clearly informs turned out to be flocks of lemmings headed over a cliff. When euphoria dominates the herd’s mentality, disciples of Buffett and Templeton head for the nearest exit. After the market’s crash land and the herd mentality sinks to between despondency and depression, they scoop up the best opportunities while everyone else is recovering from the fall and paralyzed with fear. “I don’t look to jump over seven-foot bars,” Buffett adds. “I look around for one-foot bars that I can step over.”

Another eureka moment comes from Chart B that tracks Return on Investment for the last nine years ending Dec. 31, 2008. The chart based on statistics from MSN Money.com and the Case Shiller Home Price Indices and provided by KeepingCurrentMatters.com simply says that had you spent $100 across a broad index of the Dow, S&P, or NASDAQ; versus applying the same amount toward a real estate purchase back in 2000, your $100 would now be worth $80.20 in the Dow, $64.80 in the S&P, $40.10 in the NASDAQ or $169.80 in real estate. These gains or losses extend over a nine-year period of time and have yet to be adjusted for volatility in the stock market since the New Year. Over an eight year period, real estate has fared well, supporting our belief in its long term viability; not to mention its priceless quality of being an asset you can always take extreme pride in, touch, feel, love and enjoy.

Are we at the bottom of the emotional curve where disciples of Buffett and Templeton are conditioned to pounce on the most undervalued assets? Hard to say; but also hard to imagine a greater depth of despondency than we’ve experienced over the past several months. Lately the markets have rebounded significantly based on more good news than anyone expected this soon. Have they bottomed? Too early to say. A wise man once said, “The bottom comes when everyone stops trying to call it.”

As for the real estate market, it’s also too soon to tell. But things are looking up. In Sarasota County, February home sales were up 12%, pending sales were up 55.4%, inventory was down 28% and foreclosures fell 15% from last month. It may not be the absolute bottom, but everything is moving in the right direction to get us there soon.

In an interview last week, Fed Chairman Ben Bernanke, said the recession could end this year if the government succeeds at bolstering the banking system. His remarks came just days after the Dow significantly reversed its slide on news that Citigroup and other troubled banks had unexpectedly managed to stay in the black during January and February; then had another rally on St. Patrick’s Day on the unexpected news that new housing starts were up 22% in February, the most since 1990. The improved news has investors feeling they may have been overly-pessimistic about the markets; and home buyers experiencing a new surge in confidence which is manifesting itself in significantly improved sales. That’s the herd mentality we prefer.


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