Warren Buffett’s contrarian advice

[marcus_aurelius]

One of Warren Buffett’s investment principles is that investors should be “fearful when others are greedy, and greedy when others are fearful.” That makes sense in theory, but how has anyone here really put it into practice? If you look at any finance media (e.g. CNBC or Youtube), there’s so much noise out there, and it seems that there are as many greedy vs. fearful “experts”.

(What I’ve done, which has worked for me so far, is own good stocks, and hold them for a very long time. It’s only recently that I’ve sold some stocks as my tech exposure was too high.)

So back to Buffett’s fearful vs. greedy principle — how do you put it into practice?

[BECABECA]

Buying index funds with every paycheck regardless of the noise inevitably has you being “greedy” (compared to the noise) when the noise becomes fearful and “fearful” (compared to the noise) when the noise becomes greedy. And rebalancing between stocks and bonds when one becomes out of balance relative to your asset allocation also has this same effect.

[Telecaster]

You make your money in down markets.  2008-09 was the time to back up the truck.  Same with March 2020 and COVID.  When things are crazy bad that's the time to buy.  Opposite is also true. 

Where are we know?  I don't know.  Probably more on the end of "others are greedy." 

That works if you are as smart as Warren Buffett.  The rest of us are better served by simply buying and holding low cost index funds. 

[GilesMM]

Market timing is tricky unless you know where the market is headed.

[VanillaGorilla]

Be greedy and buy index funds when others are fearful and whinging about the market being down for more than two months.

Be fearful and buy index funds instead of NFTs/Bitcoin/meme stocks when others are bragging about how much easy money they've made.

[SilentC]

It means look around the areas that are really scary or beaten down and be wary of where the “easy” money is being made.  Don’t get FOMO, be patient.  Nothing about dollar cost averaging in his approach though he has advised that for the average investor.  Poke around in areas like European equities, commercial real estate, look hard at companies that have been good or great facing troubles (Boeing?) etc.

[marcus_aurelius]

I guess I didn't word my post carefully enough. I get dollar cost averaging and also that if a stock comes down 40%, and the business fundamentals haven't changed, I should buy more of it.

My question is: at this very moment, with the Dow at 40,000, are people being fearful or greedy? And how can you tell?

[ScreamingHeadGuy]

I guess I didn't word my post carefully enough. I get dollar cost averaging and also that if a stock comes down 40%, and the business fundamentals haven't changed, I should buy more of it.

My question is: at this very moment, with the Dow at 40,000, are people being fearful or greedy? And how can you tell?

Top is in.

[GuitarStv]

If you have a mix of stocks/bonds that you rebalance at regular intervals, then the rebalancing forces you to follow this advice automatically.

[lhamo]

I took some cap gains off the table last week -- not at the peak, but close to it.  I have home renovations to fund (around $45 in early stage work in the next couple of weeks alone) and living expenses I need to cover out of the brokerage for the next 4ish years. 

We took his advice in 2009 and bought a condo in Beijing when prices were dropping due to the financial crises. That paid off well for us.  We hit the absolute bottom of the market (people at the bank were stunned at the price we got when we went in to sign the mortgage) and then the value of the unit nearly tripled by the time we sold it in early 2017.    I also threw some big chunks of money into the kids 529s in 2009-10, and that paid off well for them/us. 

My Inner Bag Lady is quite annoying so another thing I have done to keep her quiet is to have pretty large cash/cash-like positions in my retirement investments for the time being.  These roughly match my Roth contributions over time, and are funds I could tap in an emergency should the brokerage funds tank for some reason.  I can move money around easily/tax free in the retirement accounts, so that allows me to keep a bit more of the brokerage money invested while I gradually cash it out for renovation/living expenses.  SHould the market drop suddenly, I'd be able to use those cash cushions to buy shares when they are on sale.

In the grand scheme of things, though, none of us have the kind of power or resources that Buffett does.  His investment choices literally move markets.  The rest of us are pretty much riding on his wake.

[MustacheAndaHalf]

I guess I didn't word my post carefully enough. I get dollar cost averaging and also that if a stock comes down 40%, and the business fundamentals haven't changed, I should buy more of it.

My question is: at this very moment, with the Dow at 40,000, are people being fearful or greedy? And how can you tell?

CNN samples various measures of the market, which currently barely edge into their "greedy" category, just above neutral.
https://edition.cnn.com/markets/fear-and-greed

You can also visit charts for the S&P 500 and look for "relative strength indicator".

[reeshau]

I bought stock in a regional bank last spring.  Reaping the rewards now.

More generally, I don't think Buffett cares about a market being high.  Particularly when so much of the gain is in a very few, very large stocks.  He simply does not buy those.  As he also says, there are no called strikes in investing.

I think the real work comes when there are big market moves down, whether bear markets or shocks.  If you have or can build the instinct that down markets means "We're having a sale!" rather than "It's the end of the world!" then you can rationally shop for bargains.  The money is made when you buy at a great price.  If you do that, the rest is pretty easy.

If you're indexing and investing through your 401k, then yea it comes down to holding through down periods (not panicking) and DCA.

[solon]

This is a good question. How do we know if others are greedy or fearful? Is now a time of greed or fear?

A lot of people have wrestled with this question for a long time and come to the considered conclusion that — we can't. We can't tell if any given moment is greed or fear. Yes, there is the CNN indicator, and yes there are plenty of experts who will happily share their insights. But at the end of the day it all comes down to making a guess and hoping for the best. Which is a long way of saying, market timing.

The final answer, the only way to consistently make money in the stock market, is to buy VTI/VTSAX and hold it forever.

[GilesMM]

…

More generally, I don't think Buffett cares about a market being high.  Particularly when so much of the gain is in a very few, very large stocks.  He simply does not buy those.  As he also says, there are no called strikes in investing.

…

I thought he owned a ton of Apple stock, like nine figures.  I saw he bought Chubb recently, so he likes premium insurers.

[franklin4]

In extraordinary times it's easy to see the majority of people being fearful or greedy. In more normal times like now it's not. Maybe people are being a little greedier than normal but not extremely.

[GuitarStv]

This is a good question. How do we know if others are greedy or fearful? Is now a time of greed or fear?

You won't.  That's why a rebalancing strategy of some sort is generally a good idea - it does the determination automatically for you.

[mistymoney]

I guess I didn't word my post carefully enough. I get dollar cost averaging and also that if a stock comes down 40%, and the business fundamentals haven't changed, I should buy more of it.

My question is: at this very moment, with the Dow at 40,000, are people being fearful or greedy? And how can you tell?

https://www.cnn.com/business

cnn business has a fear/greed barometer at the top of page.

For us average joe investers there isn't a whole lot we can do. Scrap together a little extra to put into the market if it's like 2008, avoid putting short term savings into the market just cuz it's always going up anyway (like 1999).

[Radagast]

Buying index funds with every paycheck regardless of the noise inevitably has you being “greedy” (compared to the noise) when the noise becomes fearful and “fearful” (compared to the noise) when the noise becomes greedy. And rebalancing between stocks and bonds when one becomes out of balance relative to your asset allocation also has this same effect.

Yup, this. I don't think most people understand just how effective dollar cost averaging is at being greedy during fearful times and vice versa. If the market doubles, you are buying half as many shares with every purchase. If it loses 50%, you are buying twice as many. By the early 1980's every purchase bought 3 times more shares (adjusted for inflation) as at the 1960's peak. In the Great depression markets fell 87.5%, meaning every purchase would have bought 8 times more shares than at the peak! This is a really really powerful tool and underappreciated even by those in the know.

Buying assets that correlate poorly to stocks and have similar volatility can also add some extra oomph to rebalancing and the buy low sell high effect. While the may not be great in isolation, long term bonds and gold serve this function in small servings. Bonds with typical durations are a little more inert and more of a drag.

[Must_ache]

I don't think most people understand just how effective dollar cost averaging is at being greedy during fearful times and vice versa. If the market doubles, you are buying half as many shares with every purchase. If it loses 50%, you are buying twice as many.

Dollar cost averaging is buying shares over time rather than all at once.  If the market goes down, you are better off selling before that happens.  If the market goes up, you are better off buying before that happens.   

Now of course we do not have perfect information to be able to accomplish this, but more often than not, the market goes up; therefore I see DCA as a generally losing strategy.

[Radagast]

I don't think most people understand just how effective dollar cost averaging is at being greedy during fearful times and vice versa. If the market doubles, you are buying half as many shares with every purchase. If it loses 50%, you are buying twice as many.

Dollar cost averaging is buying shares over time rather than all at once.  If the market goes down, you are better off selling before that happens.  If the market goes up, you are better off buying before that happens.   

Now of course we do not have perfect information to be able to accomplish this, but more often than not, the market goes up; therefore I see DCA as a generally losing strategy.

Well, if you're "buying index funds with every paycheck" I guess buying shares over time is your only option, eh?

[ATtiny85]

I don't think most people understand just how effective dollar cost averaging is at being greedy during fearful times and vice versa. If the market doubles, you are buying half as many shares with every purchase. If it loses 50%, you are buying twice as many.

Dollar cost averaging is buying shares over time rather than all at once.  If the market goes down, you are better off selling before that happens.  If the market goes up, you are better off buying before that happens.   

Now of course we do not have perfect information to be able to accomplish this, but more often than not, the market goes up; therefore I see DCA as a generally losing strategy.

Well, if you're "buying index funds with every paycheck" I guess buying shares over time is your only option, eh?

It’s important to have people state their definition of DCA during these discussions. Some folks say their monthly 401k investment is DCA. Others, myself included, say that is lump sum investing. I don’t care what’s “right”, I only care that things are clear.

[Radagast]

I don't think most people understand just how effective dollar cost averaging is at being greedy during fearful times and vice versa. If the market doubles, you are buying half as many shares with every purchase. If it loses 50%, you are buying twice as many.

Dollar cost averaging is buying shares over time rather than all at once.  If the market goes down, you are better off selling before that happens.  If the market goes up, you are better off buying before that happens.   

Now of course we do not have perfect information to be able to accomplish this, but more often than not, the market goes up; therefore I see DCA as a generally losing strategy.

Well, if you're "buying index funds with every paycheck" I guess buying shares over time is your only option, eh?

It’s important to have people state their definition of DCA during these discussions. Some folks say their monthly 401k investment is DCA. Others, myself included, say that is lump sum investing. I don’t care what’s “right”, I only care that things are clear.

This part of my post describes dollar cost averaging, and there isn't an alternate interpretation I'm aware of. This is what DCA is:
"If the market doubles, you are buying half as many shares with every purchase. If it loses 50%, you are buying twice as many. By the early 1980's every purchase bought 3 times more shares (adjusted for inflation) as at the 1960's peak. In the Great depression markets fell 87.5%, meaning every purchase would have bought 8 times more shares than at the peak!"

[ATtiny85]

I don't think most people understand just how effective dollar cost averaging is at being greedy during fearful times and vice versa. If the market doubles, you are buying half as many shares with every purchase. If it loses 50%, you are buying twice as many.

Dollar cost averaging is buying shares over time rather than all at once.  If the market goes down, you are better off selling before that happens.  If the market goes up, you are better off buying before that happens.   

Now of course we do not have perfect information to be able to accomplish this, but more often than not, the market goes up; therefore I see DCA as a generally losing strategy.

Well, if you're "buying index funds with every paycheck" I guess buying shares over time is your only option, eh?

It’s important to have people state their definition of DCA during these discussions. Some folks say their monthly 401k investment is DCA. Others, myself included, say that is lump sum investing. I don’t care what’s “right”, I only care that things are clear.

This part of my post describes dollar cost averaging, and there isn't an alternate interpretation I'm aware of. This is what DCA is:
"If the market doubles, you are buying half as many shares with every purchase. If it loses 50%, you are buying twice as many. By the early 1980's every purchase bought 3 times more shares (adjusted for inflation) as at the 1960's peak. In the Great depression markets fell 87.5%, meaning every purchase would have bought 8 times more shares than at the peak!"

What money is being used for the buying? Again, for a lot of discussions, it is important to state what money is being used. Especially when someone has gotten some sort of windfall and is asking what to do.

ETA: Is “your” DCA an action or a result?

[Telecaster]

Originally, dollar cost averaging was used to describe a strategy to invest a lump sum of money into the market over time.  Hence the "averaging" part.   In recent years, many people use DCA to mean making regular, periodic investments.    That seems to be how most people use the term nowadays. 

As per above, I don't care how people use the term, but clarity is nice.   

[Radagast]

I don't think most people understand just how effective dollar cost averaging is at being greedy during fearful times and vice versa. If the market doubles, you are buying half as many shares with every purchase. If it loses 50%, you are buying twice as many.

Dollar cost averaging is buying shares over time rather than all at once.  If the market goes down, you are better off selling before that happens.  If the market goes up, you are better off buying before that happens.   

Now of course we do not have perfect information to be able to accomplish this, but more often than not, the market goes up; therefore I see DCA as a generally losing strategy.

Well, if you're "buying index funds with every paycheck" I guess buying shares over time is your only option, eh?

It’s important to have people state their definition of DCA during these discussions. Some folks say their monthly 401k investment is DCA. Others, myself included, say that is lump sum investing. I don’t care what’s “right”, I only care that things are clear.

This part of my post describes dollar cost averaging, and there isn't an alternate interpretation I'm aware of. This is what DCA is:
"If the market doubles, you are buying half as many shares with every purchase. If it loses 50%, you are buying twice as many. By the early 1980's every purchase bought 3 times more shares (adjusted for inflation) as at the 1960's peak. In the Great depression markets fell 87.5%, meaning every purchase would have bought 8 times more shares than at the peak!"

What money is being used for the buying? Again, for a lot of discussions, it is important to state what money is being used. Especially when someone has gotten some sort of windfall and is asking what to do.

ETA: Is “your” DCA an action or a result?

The source of the money doesn't matter, saying 'If prices double I'll buy half as many, and if prices halve I'll buy twice as many, and all possible permutations thereof" then you are dollar cost averaging.

It's an action.

[Radagast]

Originally, dollar cost averaging was used to describe a strategy to invest a lump sum of money into the market over time.  Hence the "averaging" part.   In recent years, many people use DCA to mean making regular, periodic investments.    That seems to be how most people use the term nowadays. 

As per above, I don't care how people use the term, but clarity is nice.

Originally it was a choice between share cost averaging "I'll buy 100 shares of GM a month" versus dollar cost averaging "I'll buy 100 dollars of GM a month" back when the former made more sense.  Benjamin Graham referred to regular paycheck investing as DCA in "The Intelligent Investor" (though the exact phrase he said used those words but in a slightly different arrangement I can't remember." You can make regular periodic investments by value averaging as well, and perhaps other methods.

But what I described is specifially dollar cost averaging.

[reeshau]

…

More generally, I don't think Buffett cares about a market being high.  Particularly when so much of the gain is in a very few, very large stocks.  He simply does not buy those.  As he also says, there are no called strikes in investing.

…

I thought he owned a ton of Apple stock, like nine figures.  I saw he bought Chubb recently, so he likes premium insurers.

He does own Apple.  He certainly hasn't bought any recently.  In fact, he has been trimming the position, hinting that it has to do with Berkshire's taxes.

Chubb is a recent purchase, so he must think it is (or was) cheap.  These judgments are independent of stories ofmthe market's valuation.

[Heckler]

My question is: at this very moment, with the Dow at 40,000, are people being fearful or greedy? And how can you tell?

https://www.cnn.com/markets/fear-and-greed

CNN's got you covered.

I just try to rebalance through contributions to my fixed income/equity ratio per my asset allocation (5% cash / 25% fixed income / 70% equity). 

- Contributed 6k to Bonds so far this year in RRSP
- RRSP has 25k S&P500 slated to be moved to Bonds in August.
- currently 1% high on cash allocation which needs to be moved to fixed income. I prefer to keep that cash in non-registered to reduce capital gains when interest rates drop.

[ATtiny85]

I don't think most people understand just how effective dollar cost averaging is at being greedy during fearful times and vice versa. If the market doubles, you are buying half as many shares with every purchase. If it loses 50%, you are buying twice as many.

Dollar cost averaging is buying shares over time rather than all at once.  If the market goes down, you are better off selling before that happens.  If the market goes up, you are better off buying before that happens.   

Now of course we do not have perfect information to be able to accomplish this, but more often than not, the market goes up; therefore I see DCA as a generally losing strategy.

Well, if you're "buying index funds with every paycheck" I guess buying shares over time is your only option, eh?

It’s important to have people state their definition of DCA during these discussions. Some folks say their monthly 401k investment is DCA. Others, myself included, say that is lump sum investing. I don’t care what’s “right”, I only care that things are clear.

This part of my post describes dollar cost averaging, and there isn't an alternate interpretation I'm aware of. This is what DCA is:
"If the market doubles, you are buying half as many shares with every purchase. If it loses 50%, you are buying twice as many. By the early 1980's every purchase bought 3 times more shares (adjusted for inflation) as at the 1960's peak. In the Great depression markets fell 87.5%, meaning every purchase would have bought 8 times more shares than at the peak!"

What money is being used for the buying? Again, for a lot of discussions, it is important to state what money is being used. Especially when someone has gotten some sort of windfall and is asking what to do.

ETA: Is “your” DCA an action or a result?

The source of the money doesn't matter, saying 'If prices double I'll buy half as many, and if prices halve I'll buy twice as many, and all possible permutations thereof" then you are dollar cost averaging.

It's an action.

Your position is clear. I am done here.

[Must_ache]

Well, if you're "buying index funds with every paycheck" I guess buying shares over time is your only option, eh?

I don't consider this DCA although I wouldn't blame you for disagreeing.
It's not a conscious decision to invest a lump sum over a period of time; on the contrary, it's immediately investing money you obtain periodically.

DCA is of course market timing.  If you believe the market's general trend is up, you should invest the money right away.  Delaying the immediate investment implies you think you know better.

[clarkfan1979]

I have a Ph.D. in Applied Social Psychology. I studied "social norms" in grad school. It has served me well with purchasing real estate. If you want to do a deep dive on the whole, "buy when others are fearful", I would recommend the book "Emotional Contagion" by John Cacioppo. Warren Buffett believes in emotional contagion so much that he made a conscious decision to remove himself from New York City and move back to Omaha. 

I have 3 rentals and a primary house. The 3 rentals were former primary homes. I purchased property #2 in Fort Myers, FL in January 2012 for 95K. The house would have sold for 250K in 2006. Many of my peers were fearful and told me not to do it. The house is now worth 375K and it rents for $2650/month. My original mortgage was $685/month and went down to $640?month after I paid off the PMI. I did a cash-out re-fi in 2019 to buy my current primary home. My current mortgage is $1650/month.

I very rarely buy individual stock. I've done it 4 times over the past 25 years. During the pandemic a buddy talked me into "picking a stock" as a game in March 2020. I agreed and tracked Southwest stock (LUV) for two months. I waited until the country was the most pessimistic about the pandemic and then pulled the trigger at 23.05, which is lower than the lowest closing price of the year. I am smart enough to not try to do it again. It was a one in a million shot and I made it. I sold at 39.05 in October 2020 to help with a re-finance of a rental property.     

[marcus_aurelius]

I have a Ph.D. in Applied Social Psychology. I studied "social norms" in grad school. It has served me well with purchasing real estate. If you want to do a deep dive on the whole, "buy when others are fearful", I would recommend the book "Emotional Contagion" by John Cacioppo. Warren Buffett believes in emotional contagion so much that he made a conscious decision to remove himself from New York City and move back to Omaha.

Thank you, I will check out the book. This is exactly what I was looking for.

The CNN link (https://www.cnn.com/markets/fear-and-greed) including the breakdown by momentum, breadth, etc is helpful. I agree with the chart that we're in "greedy" times right now, and I was surprised that we're not in "extreme greed" overall -- I strongly suspect we're in "extreme greed" for the tech sector. I have a lot of tech stocks, and for the last year or so, have taken a good amount of profits off the table, while not selling it all. I have made a few rules for myself (e.g. if NVDA goes up 10%, sell 10% of my NVDA portfolio) -- while unscientific, this approach allows me to continue to profit if it goes up but also sleep peacefully at night.

Thanks to all for the spirited discussion. FWIW, I have DCA'ed for more than 20 years but I won't consider DCA'ing as being fearful when others are greedy or vice versa. But I get why someone may think that way.

[franklin4]

I have a Ph.D. in Applied Social Psychology. I studied "social norms" in grad school. It has served me well with purchasing real estate. If you want to do a deep dive on the whole, "buy when others are fearful", I would recommend the book "Emotional Contagion" by John Cacioppo. Warren Buffett believes in emotional contagion so much that he made a conscious decision to remove himself from New York City and move back to Omaha. 

I have 3 rentals and a primary house. The 3 rentals were former primary homes. I purchased property #2 in Fort Myers, FL in January 2012 for 95K. The house would have sold for 250K in 2006. Many of my peers were fearful and told me not to do it. The house is now worth 375K and it rents for $2650/month. My original mortgage was $685/month and went down to $640?month after I paid off the PMI. I did a cash-out re-fi in 2019 to buy my current primary home. My current mortgage is $1650/month.

I very rarely buy individual stock. I've done it 4 times over the past 25 years. During the pandemic a buddy talked me into "picking a stock" as a game in March 2020. I agreed and tracked Southwest stock (LUV) for two months. I waited until the country was the most pessimistic about the pandemic and then pulled the trigger at 23.05, which is lower than the lowest closing price of the year. I am smart enough to not try to do it again. It was a one in a million shot and I made it. I sold at 39.05 in October 2020 to help with a re-finance of a rental property.   

Warren is a genius and you don't seem to dumb yourself! Good for you to only pick stocks very rarely! I have tried to pick stocks too often, some do well, some don't, and some are in the middle. As I age I am drawn more to VOO and BRKB which are my primary investments lately. Think I should take a look at Emotional Contagion....

[GilesMM]

…

More generally, I don't think Buffett cares about a market being high.  Particularly when so much of the gain is in a very few, very large stocks.  He simply does not buy those.  As he also says, there are no called strikes in investing.

…

I thought he owned a ton of Apple stock, like nine figures.  I saw he bought Chubb recently, so he likes premium insurers.

He does own Apple.  He certainly hasn't bought any recently.  In fact, he has been trimming the position, hinting that it has to do with Berkshire's taxes.

Chubb is a recent purchase, so he must think it is (or was) cheap.  These judgments are independent of stories ofmthe market's valuation.

Before the crash of 2008 I recall him saying he was not buying anything (for several years) and instead building up a warchest of cash as everything looked overvalued to him at the time.

[roomtempmayo]

My question is: at this very moment, with the Dow at 40,000, are people being fearful or greedy? And how can you tell?

I think people have been either neutral or greedy for so long we've forgotten what fearful looks like.

When people are really scared - like, sell everything and hold cash scared - it's front page news.  The market crashes and stays there, which we haven't seen since ~2008.

To the bigger question, it's tough for an average investor to act on Buffet's advice in any consistent way because we aren't making the sort of big moves like buying entire businesses where having a mountain of cash in reserve makes sense.  For most of us, that's a big opportunity cost that we're very unlikely to overcome through any sort of timing.  The closest thing a typical person can do is leverage themselves in real estate, as @clarkfan1979 mentions.  It's been a long time since that's been a clear opportunity, but if we had a 30% drop in residential housing values I'd definitely be heading to the bank.  Tough to do that with equities, though.

[ChpBstrd]

My implementation is to enter into options contracts to hedge my risk exposure when VIX is low. In this way I'm hedging when markets are optimistic.

[vand]

One of Warren Buffett’s investment principles is that investors should be “fearful when others are greedy, and greedy when others are fearful.” That makes sense in theory, but how has anyone here really put it into practice? If you look at any finance media (e.g. CNBC or Youtube), there’s so much noise out there, and it seems that there are as many greedy vs. fearful “experts”.

(What I’ve done, which has worked for me so far, is own good stocks, and hold them for a very long time. It’s only recently that I’ve sold some stocks as my tech exposure was too high.)

So back to Buffett’s fearful vs. greedy principle — how do you put it into practice?

Generally, you shouldn't.  By its very definition most people cannot be contrarian. 

What you can do, as others have said, is remain unwaveringly consistent with regular cost-averaged buys over a long period.  You will buy less units when the market is expensive and more units when the market is cheap, and over time you'll gain a little benefit from this, as well as benefit from the general long term uptrend.


Also, the quote was not really "advice"... he was describing how he himself goes about his investing (or did at one point)... I believe the quote in a more full context is something like "we strive to be fearful when others are greedy, and greedy only when others are fearful."

If you want to nurture your contrarian side, it's not  that difficult.  Pull your money out of VTSAX, find a market that has gone through a long and deep bear market, make a case for it, and then put your money where your mouth is. 

[reeshau]

The broadcast piece of advice Warren has offered is:

"Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”

Essentially, it's his advice to index.

[Telecaster]

To the bigger question, it's tough for an average investor to act on Buffet's advice in any consistent way because we aren't making the sort of big moves like buying entire businesses where having a mountain of cash in reserve makes sense.  For most of us, that's a big opportunity cost that we're very unlikely to overcome through any sort of timing.  The closest thing a typical person can do is leverage themselves in real estate, as @clarkfan1979 mentions.  It's been a long time since that's been a clear opportunity, but if we had a 30% drop in residential housing values I'd definitely be heading to the bank.  Tough to do that with equities, though.

For sure.   The thing to do for most retail investors like us is to simply not panic and sell.   Finding the top is hard, but finding the bottom is even harder.   

[clarkfan1979]

It might be possible to be more contrarian when buying stock than real estate because buying stock can be more private. If your friends and family are unaware of your contrarian move, you might face less resistance. Buying real estate is publicly recorded and more difficult to hide from your family and friends. When being contrarian with real estate be ready for disagreements with your family and friends. Even though it's none of their business, they will let you know that it's a bad idea. They do this because they care about you and they mean well, but ultimately it's mostly bad advice. 

When trying to be contrarian from an efficient market hypothesis, you are betting against the rest of the market, correct? That is how I see it. However, in practical terms, it's very difficult to be contrarian among your social network of family and friends. Your social network is going to be the most influential and that part will be the most difficult to go in a different direction. If your social network is deciding to be contrarian with you and going against the larger market, it's an easier decision to make because you have the support of family and friends to be contrarian against the larger market. However, when your social network is consistent with the larger market and you decide to go against your social network, that one is hard.

All four of my real estate purchases were contrarian in different ways.

House #1 was contrarian because of timing and it was a foreclosure that needed cosmetic work. I purchased in May 2007. The economy was becoming unstable, real estate sales slowed and the consensus was "wait and see." House was originally listed for 228K in October 2006 and the bank lowered the price 10K/month. When it hit 178K, my offer was 182K and I got it. I put 10K worth of work into it and it was worth about 210K after repairs. I had 3 roommates that covered the mortgage. I lived for free for my remaining 4 years of grad school. It's now worth 525K and market rent is around $3000/month. Original PITI was $1040/month in 2007 and then lowered to $940/month in 2009 with a re-fi.

House #2 was the biggest contrarian move I ever made. I got a house under contract in Fort Myers, FL in 95K in October 2011 and closed in January 2012. The house was previously worth about 250K in 2006. This was not scary at all for me because the price point was low and the location was great. However, this purchased had the loudest opposition from my social network. The reasoning for this was because the prices of these houses dropped from 250K to 100K in about 5 years. To the average person, this is scary and it means "don't buy because I'm scared." To me it was, "this is a great deal, pull the trigger." Today it's worth about 375K and market rents are $2700/month. Original PITI was $685/month. 

House #3 was contrarian because it was "too expensive" among my social circle. From a national perspective, many people thought the housing market was now fully recovered and had no room to increase, so real estate moves were considered more risky due to limited upside. I purchased in June 2018 in Koloa, HI for 603K and it needed about 50K worth of work. It's now worth about 1.3 million and rents for $6200/month. Original PITI was $2700/month. It's now $3150/month due to increases in taxes and insurance.

House #4 was contrarian because the median house price for the neighborhood was 240K and I bought for 280K. I honestly didn't have much resistance from family and friends during the process. However, after I bought, many co-workers went out of their way to let me know that I "over-paid" because my purchase price of 280K was higher than the median of 240K. However, in my opinion, I didn't overpay. I actually got a deal because the seller missed the summer selling season. He listed in September 2019 and I closed in November 2019. If he listed in May 2019, he would have got 300K for the house due to more buyers in the summer. The seller was a contractor and he did an 11-month flip. His wife is a physician and he flips houses as a hobby. He doesn't really need the money. It's now worth about 400K.

When you make contrarian moves against your family and friends and end up being correct, your world becomes lonely. Your family and friends will not rally behind you and celebrate you. Even though you were correct, your resistance to the social pressure will create social fractures. This point was beautifully illustrated in the movie, "The Big Short". At the end of the movie, even though Michael Burry made money for himself and his investors, he decided to close the fund because his relationships suffered. Another point beautifully illustrated in the movie is that after his massive success with shorting the housing market, he then wanted to buy stock in 2010. He immediately got resistance from his partner because the stock market was too low and tanking. Once you have success being contrarian, nothing will change. When you go to make another contrarian move, your social network will not give you the benefit of the doubt. They will give you the same resistance they did the first time. People can't help themselves.   

[blue_green_sparks]

....When you make contrarian moves against your family and friends and end up being correct, your world becomes lonely. Your family and friends will not rally behind you and celebrate you. Even though you were correct, your resistance to the social pressure will create social fractures.....

Right. I have friends who don't have two nickels to rub together who believed they needed to give me all sorts of unsolicited financial advice. "You need to <insert something really stupid here>". I cordially agree just to end the conversation pronto. When I suddenly FIRE'd, a few friends were dumbfounded and now they occasionally ask for my financial advice, so I direct them to Bogleheads.

[roomtempmayo]

Interesting consideration of the social pressures, @clarkfan1979 .  I hadn't really considered the ways real estate makes your decisions public in a ways that equities don't.

Employment might also be a contrarian choice.  When the economy is up risky, volatile areas feel compelling, but maybe that's the time to head for a megacorp or government.  And vice versa, when the economy is in the dumps, maybe that's the time to join a startup or strike out on your own. 

[ChpBstrd]

Employment might also be a contrarian choice.  When the economy is up risky, volatile areas feel compelling, but maybe that's the time to head for a megacorp or government.  And vice versa, when the economy is in the dumps, maybe that's the time to join a startup or strike out on your own.

I've thought about this too. The people chasing bigger paychecks into "risky, volatile areas" of the economy with job moves during the good times often end up suffering 6-12 months without an income when the bad times arrive because they have the least seniority/value to their employer and because they were usually hired to fill a growth niche that will be the first place to die back if the economy shrinks. The loss of several months' income negates a few years of higher earnings in most cases.

So if you think a recession is within a couple of years away, as it usually is, then maybe it's time to hitch your wagon to a stable employer and build up seniority/value. But because that is true most of the time, it almost never makes sense to take the sort of chances that lead people on this forum to much higher salaries and much shortened careers.

The other paradox is that the bad times - when it is the best time to take a chance on a "risky, volatile" job - are exactly the times when few such jobs are available and the competition is most fierce. There's not a way to buy low, sell high with jobs, because you don't get to sell the value of any stability you leave behind or buy upside leverage.

The counterargument is that the good times are when you should try to take a chance. When unemployment is low, there is less competition for senior positions and so employers have to settle on .... you! What I mean by that is it's possible to jump two or three levels at a time instead of struggling to advance one level. With a year or two of such a job on your resume, you're suddenly "experienced" at a higher level and can be considered for the next thing, even if you are laid off.

That's risky of course, but tis the nature of getting rewards.

[roomtempmayo]

The loss of several months' income negates a few years of higher earnings in most cases.

I remember reading a study about savings patterns that showed both that Americans are actually pretty good at saving when they have a job with an employer sponsored plan and that they hit retirement without nearly enough saved.  The apparent contradiction is explained by people robbing their retirement accounts when they get laid off.

Someone who pulled $150k out of the S&P in September of 2009 to tide them over a job loss would have had over $1m today if they'd let the money sit.  That was an extremely expensive layoff.

[reeshau]

The loss of several months' income negates a few years of higher earnings in most cases.

I remember reading a study about savings patterns that showed both that Americans are actually pretty good at saving when they have a job with an employer sponsored plan and that they hit retirement without nearly enough saved.  The apparent contradiction is explained by people robbing their retirement accounts when they get laid off.

Someone who pulled $150k out of the S&P in September of 2009 to tide them over a job loss would have had over $1m today if they'd let the money sit.  That was an extremely expensive layoff.

There is also the fact that half of the US workforce does not have access to a 401k. Even if you max an IRA, you won't build anywhere near the same wealth as you can with a 401k, with company matches.

[ChpBstrd]

The loss of several months' income negates a few years of higher earnings in most cases.

I remember reading a study about savings patterns that showed both that Americans are actually pretty good at saving when they have a job with an employer sponsored plan and that they hit retirement without nearly enough saved.  The apparent contradiction is explained by people robbing their retirement accounts when they get laid off.

Someone who pulled $150k out of the S&P in September of 2009 to tide them over a job loss would have had over $1m today if they'd let the money sit.  That was an extremely expensive layoff.

Yes, and this is a good argument for holding a mediocre job at the postal service or something, rather than spinning one's wheels chasing corporate promotions. When you have income during the bad times, you're plowing money into stocks at their bottoms, instead of missing the bottom due to being unemployed. Even worse is to be forced to sell near the bottom, as the people you describe were doing. It's like SORR before even being retired!

Of course, most of these people raiding their 401k are consumer-suckas with truck payments, multiple streaming subscriptions, vice habits, too-big houses, high discretionary / luxury spending, etc. Maybe a mustachian could thread the needle, suffering the occasional layoff, using emergency funds instead of raiding the 401k, and making up for the inability to invest at the bottom with earnings growth.

[Heckler]

[q. Maybe a mustachian could thread the needle, suffering the occasional layoff, using emergency funds instead of raiding the 401k, and making up for the inability to invest at the bottom with earnings growth.

Not maybe. 

For sure, but it helps if you have dual incomes and only one gets laid off and finds a new position before employment insurance runs out.  We’ve been there four times in an expensive city with a fresh mortgage.   We didn’t know the term “emergency fund”, but had ~10k in savings outside of RRSP.

The key is to never over-leverage your debt.  I’d paid cash for a ridiculously nice mountain bike in 2003, and a month later got laid off. It was the best time ever, job hunting and riding the next three months.

[franklin4]

Getting back to Buffett's activities, in today's news it's been revealed that Berkshire Hathaway has sold half of its Apple holdings and a bunch of Bank of America, and now has a record high cash position. Is that an indicator that the top is in and BRK is getting positioned to buy after a market decline? Seems very possible!

[Heckler]

Getting back to Buffett's activities, in today's news it's been revealed that Berkshire Hathaway has sold half of its Apple holdings and a bunch of Bank of America, and now has a record high cash position. Is that an indicator that the top is in and BRK is getting positioned to buy after a market decline? Seems very possible!

Isn’t that also called rebalancing to your diversified asset allocation?  I don't follow BRK, but a 5% cash allocation could also be at a “record high”.  I know my cash is at a record high, although perfectly as per my IPS.

[reeshau]

I find, as I trim winners and close out shorter term positions (GLP-1 anti-hype in medical devices) that I also have a high cash position.  It's not a strategy to time the market, but I don't find a lot of new ideas that excite me.

The fact that I can park it at 5% also helps make me picky.