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Warren Buffett 1986 Letter: Being Greedy When Others Are Fearful

In his 1986 letter to investors of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), Warren Buffett (Trades, Portfolio) told his shareholders that he was struggling to find attractively-priced public securities:

"When conditions are right that is, when companies with good economics and good management sell well below intrinsic business value - stocks sometimes provide grand-slam home runs...

But we currently find no equities that come close to meeting our tests."

The CEO of Berkshire then went on to make what has become one of his most famous statements of all time, and one that could not be more relevant in the current market:

"What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

Taking advantage of the volatility

Berkshire has been adding to its position in Delta Airlines (NYSE:DAL) recently, and it's rumored that the company has also been repurchasing significant amounts of its own stock. Berkshire spent $5 billion repurchasing shares last year at prices above $200 per share on average. The stock has recently traded as low as $176 at the time of writing.

Being greedy when others are fearful is excellent advice for the current market. However, buying stocks just because they look cheaper now than they did at the beginning of the year is not a sensible value investing strategy in and of itself.

Lee Ainslie (Trades, Portfolio)'s Maverick Capital recently put out a great note to its investors on this topic. In the memo, the hedge fund reported that it had seen market conditions like this before, although not exactly like the ones we see today.

The fund went on to say that it likes to use these conditions to buy the companies that it believes have the brightest prospects at reasonable prices. These are not just any old businesses. As the note to investors stated, these tend to be operations the firm has watched for some time and has been waiting to buy at the right price.

This advice, combined with the advice Warren Buffett (Trades, Portfolio) issued to his shareholders in 1986, gives investors a helpful road map for the current environment.

Fear and greed

Fear and greed will always drive markets. They will motivate investor decisions until there's more clarity on the factors that have resulted in the change in investor sentiment.

As individual investors, there is nothing we can do about this. All we can do is sit back and watch the market action unfold, and, more importantly, not make any stupid decisions in the meantime.

Then, when stocks hit prices that look attractive based on a conservative estimate of their intrinsic value, it could be time to buy. It is impossible to time the market, so there's no point trying. However, buying stocks when they're trading with a wide margin of safety to intrinsic value is always a sensible strategy.

Put simply, in the current environment, it is essential to keep calm and avoid making any foolish decisions while at the same time taking advantage of opportunities when they present themselves. In the long term, the market should recover, as it has done many times in the past.

Disclosure: The author owns shares in Berkshire Hathaway.

Read more here:

  • Warren Buffett: Leverage Can Force You to Make Bad Decisions

  • Should Investors Chase Dividends or Buybacks?

  • Assessing the Worst-Case Scenario for Delta

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This article first appeared on GuruFocus.