Emotions have a habit of handicapping many investors — and in that moment of dumbfoundedness is your chance to capitalize. Taking advantage of the herd mentality by removing yourself from it allows you to see opportunities sprouting up throughout the stock market.
For example, those who weren’t fearful early in 2009 and decided to go against the grain realized huge profits after the recovery of the stock market to the point where it has recently reached new highs. But if you don’t believe going against the grain works, ask Warren Buffett.
Buying when others say the sky is falling
If you had invested in American banks in 2009, you would have been worthy of a medal celebrating your investing savvy. If you were to invest in them now, many of those medals are still up for grabs, because the majority still says you can’t bank on the banks, and that’s keeping prices down.
Not many people had the wherewithal to buy up banks after they nosedived during the recession, and countless investors are still saying the sky is falling on American banks. But, there is at least one person worthy of being recognized for his investment know-how: Warren Buffett.
The stock market guru’s Berkshire Hathaway purchased 50,000 shares of Bank of America Corp (NYSE:BAC) Series T Preferred Stock in 2009. And Buffett doesn’t mess around. Berkshire’s value increased by about 24% over the last year, thanks in part to Bank of America’s stellar performance.
In making purchases, Buffett often seeks out undervalued large-cap stocks that fall into the too-big-too-fail category. That makes banks such as Bank of America Corp (NYSE:BAC) an attractive prospect. Investing against the majority is a brave move, but if you think it’s too risky, ask any one of Buffett’s billions of dollars what they think of the strategy.
Buffett went on record as saying in March to CNBC that he will run the warrants on Bank of America Corp (NYSE:BAC) until they expire in almost 9 years. “We expect Bank of America in eight-and-a-half years to be worth significantly more than what it is now,” he said on the show. He went on to say the mortgage problems that still haunt Bank of America are being addressed.
Buying when others say the stock has done its run
But Buffett doesn’t only buy large companies that have nosedived. In 1988, he purchased $1 billion worth of shares of The Coca-Cola Company (NYSE:KO). The majority at the time thought the firm was fully valued. Again, Buffett went against the grain and came out on top. Today, that investment is worth about $10 billion and he is receiving $250 million in dividend each year.
Buffett made the purchase as The Coca-Cola Company (NYSE:KO) was coming off eight consecutive years of almost 20% gains. While the stock has remained relatively steady over the past 15 years, Buffett’s strategy is to buy stocks and hold them forever, and despite a dismal performance over about half of those The Coca-Cola Company (NYSE:KO) years, he’s still made a tidy sum over one of his largest-ever investments.
How to know when the public is wrong
If the majority is fearful, and they are screaming “sell,” there’s likely an upcoming buying opportunity after a sell-off. Generally, public sentiment gives you an indication of the short-term market trend. But, if you are a buy-and-hold investor like Buffett, it doesn’t matter what happens in the short-term. And anyone who has been paying attention for the last five years should realize that the sky is still intact, and buying opportunities are still here.
The article Is the Sky Really Falling? No, It Isn’t originally appeared on Fool.com.
Phillip Woolgar has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola. The Motley Fool owns shares of Bank of America.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.