Warren Buffett's Famous Saying Bears Repeating Now

If you’re an investor, you’ve probably heard or read this quote from Warren Buffett countless times: “Be fearful when others are greedy, and be greedy only when others are fearful.” Like many other pieces of great advice, this is much easier to say than it is to actually do — because when it comes to participating in financial markets, acting on this means you buy when prices drop and you can sell when prices rise.

If you took this advice to heart, you might be feeling quite greedy these days. Thanks to the coronavirus pandemic, investor fear is running rampant. It’s not that investments feel more risky these days, but that things feel more uncertain. And as much as humans hate risking a loss, we tend to hate uncertainty even more.

That’s reflected in the market right now as extreme volatility and a correction of prices that pushed the S&P 500 back to where it was in 2018. But I would still argue that we need to keep Buffett’s famous advice in mind, and make sure we maintain a rational, long-term perspective on what we’re seeing in the markets right now.

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Don’t Get Caught in the Madness of the Mobs

As humans, we’re social creatures who evolved to follow each other and conform. From an evolutionary perspective, this is sensible. The person who wandered away from the tribe (or got themselves cast out because they didn’t conform to the group’s norms and behave as everyone else did) was in more physical danger than the people who stuck together.

This urge to do what the group does, however, gets us into serious trouble in the modern world — and especially in the financial markets. If we were all perfectly rational, we might never see prices take such dramatic back-and-forth swings like we saw in early March 2020.

This kind of extreme volatility happens because panic and fear are highly contagious, much like the virus itself. This event sparked global concern, worry, anxiety and uncertainty about what happens next. As investors begin to react emotionally and act on their fears, the markets plummet and can set off a chain reaction of more and more people jumping out of a scary situation.

That can trigger a vicious cycle: As more people panic, more people jump out of the market. As more people jump out of the market, more people who initially stayed calm can’t take the uncertainty anymore and jump out, too, which makes the sell-off worse. This is, in part, the “madness of mobs.” It’s groupthink or herd mentality at work, and not for the better.

I cannot overstate the influence other people’s actions have on us — and how little we can be aware of this fact at the same time. As Cass Sunstein and Richard Thaler discuss in their book, Nudge: Improving Decisions About Health, Wealth, and Happiness, the urge to do what other people are doing is so strong that people will start doubting what their own knowledge or sense are telling them in order to fall in line with the herd.

Same Fear, Different Cause

None of this is to suggest the coronavirus outbreak is “no big deal” or not something to take seriously. It is, quite literally, deadly serious.

At our firm, we’ve been taking active, preventative measures to focus on what we can control in this situation and following recommendations of experts. We have moved all in-person client meetings to virtual ones held via Zoom video conferences; we have canceled or rescheduled plans to ensure we and others can minimize exposure to public spaces and crowds; and my wife and I have practiced social distancing to reduce potential spread of the illness.

And I’d be lying if I said we weren’t currently experiencing higher-than-normal feelings of stress, anxiety and worry. If you feel concerned or scared about the pandemic, I don’t think you’re being unreasonable or irrational. You are not overreacting; this is a frightening situation. But the potential problem is not that you might feel afraid; the problem is acting on that fear and believing that “this time it’s different.”

While history does not repeat itself, we can spot trends if we look to the past to see how humans have dealt with — and triumphed over — various crises. If you look at events that investors responded to with fear over the last 100 years, you will see similar spikes to what we see now during the 1918 Spanish flu outbreak, the Oct. 29, 1929 stock market crash and Great Depression, the second World War, and the conflicts that followed in Korea and Vietnam.

More recently, investor fears spiked in response to the 9-11 terrorist attacks, other viral outbreaks including MERS, SARS and Ebola, and during the Great Recession. The current coronavirus pandemic is not the exact same as any of these other events, but the point is in some fashion we have been here before.

We’ve faced the fear of extreme uncertainty. We’ve mourned the loss of hundreds of thousands of lives through wars, violence and disease. We’ve witnessed whole industries wither and eventually collapse or suddenly implode. Through it all, the financial markets have always recovered. It might have taken months or recovery may have required years, but it did happen.

Don’t Lose Sight of the Forest Just Because We’re Currently in the Thick of the Trees

There is no doubt that through this current event, there will be losers in the market. Companies will fail, businesses will suffer and entire industries will take a hit so hard they can’t bounce back. But that doesn’t mean all companies, all businesses and all industries share the same fate. It can feel like there’s no way things can get better when you’re going through a hard time, but we need to maintain a broader, more long-term perspective.

Can’t see how things get better? Well, you’re right. Cruise lines might never be the same. But Zoom sure is sitting pretty right now as we’re all forced to take working from home to a massive, mainstream scale never seen before. That’s just a tiny, near-term example — but the point is this: If there are losers, there are winners, too.

We fully expect there to be businesses that thrive in response to the current crises. If some companies struggle, others will rise to the challenge and innovate. While a few industries might find themselves diminishing, others will flourish.

Uncertainty cuts both ways. We’re not sure of what happens in the future. Things could get much worse in the coming weeks and months. Or we could get unexpected good news. The only thing we know for sure is that there are a lot of possibilities, some that are worrisome and some that are more exciting and positive. Who knows what opportunities could be right around the corner? Who knows what new value could be created out of the ashes of this trying time?

The best way to capture a piece of the winners and ride the market back up to recovery is to diversify your portfolio. Diversification helps you mitigate risk while participating in upside potential.

And if you’re a long-term investor, this current market environment could be exactly when you not only need to remember Warren Buffett’s advice about what to do when everyone else feels fearful — but to act on it, too. Contributing to a diversified portfolio right now could be a big opportunity if you can leave those funds invested for at least 10 to 20 years.