The Greatest Buy Signals For This Brutal Market

Published in Investing on 7 October 2011

The market's best investors are bullish on shares.

So we're a week into October, and we've already seen a manic FTSE plunge below 5,000.

Let's face it: the omens for this month are not great. Whether it's Greek debts, bank ratings, currency wars, Chinese inflation, rising unemployment, government cutbacks, peak oil or the gold bubble, investors everywhere seem to have every reason to sell.

Or at least not buy.

Five month of declines

The UK stock market has fallen every month for the last five months now. Declines of 1% during May and June were then followed by 2%, 7% and 5% drops during July, August and September.

A poor October will then give the FTSE a record-equalling run of six monthly declines. True, we might not have seen a 20% bear market just yet, but my portfolio certainly feels like it has! 

Indeed, I'm not sure what I'd prefer right now -- one great big shocking crash to get everything over and done with, or what we have now: a relentless sinking market, slowly eroding all of our pension plans and life savings... tempting us all to buy in and find the bottom... only to slide lower next week and next month.

What I'd really prefer is a market that actually goes up, or at least does not go down.

But there is hope

As I keep on telling myself, it's pessimistic times such as these that create the very best buying opportunities.

Now I could bang on about valuations, and how the FTSE is trading at 8 times earnings, and how household names such as Barclays (LSE: BARC) and BP (LSE: BP) are trading on P/Es of 5 or less.

I could also bang on about how leading FTSE names, such as National Grid (LSE: NG) and Vodafone (LSE: VOD), are yielding a super juicy 5%-plus.

Or how stalwarts such as Tesco (LSE: TSCO) and GlaxoSmithKline (LSE: GSK) have advanced their dividend payments throughout the banking collapse and this credit recession.

Then again, I could bang on about the healthy long-haul returns from shares, how history shows the stock market always pulling through past downturns, and how the best time to buy is always when there's blood on the streets.

Step forward the experts

But to me at least, the greatest buy signals for this brutal market have emerged from two particular investment experts.

Now you'll have certainly heard of these gurus. Both buy big-name shares, invest for the long run, and have proven -- and public -- records of successful stock-picking in unbridled bull markets, crippling bear markets and even bewildering what-on-earth-is-going-on markets like we face today.

Basically, all I need to know is that, if Neil Woodford and Warren Buffett are ultra-bullish in these awful times, then so am I.

The Woodford way

Let me take Neil Woodford first, who runs the country's two largest investment funds and currently has about £19b under his control. Mr Woodford has thumped the index over time -- his funds, with dividends reinvested, have returned about 160% during the last ten years versus just 60% from the wider market.

Anyway, Mr Woodford issued a remarkable statement in May. He declared: 

"During the technology bubble the disparity between price and fundamental value was stretched astronomically in both directions, and [I] see an opportunity of that scale again now in the stock market -- a 'once in a decade opportunity'. This has presented... an opportunity to invest in high-quality businesses at what [I] believe are very attractive levels..."

A 'once in a decade opportunity' sounds extremely promising to me, especially when Mr Woodford knows all about fundamental value. He of course famously piled into high-yield stocks such as British American Tobacco (LSE: BATS) during the technology boom, and so clearly has a record of betting -- and winning -- against the crowd.

Since Mr Woodford issued his May statement, the FTSE has slid from 5,989 to about 5,200. Many of Mr Woodford's favoured shares can still be picked up at their May prices, while some, including AstraZeneca (LSE: AZN) and BT (LSE: BT-A), can now be purchased at cheaper levels.

The Buffett buyback

So on to Warren Buffett and another 'once in a decade opportunity'. Mr Buffett runs Berkshire Hathaway (NYSE: BRK-A.US), an $183b US investment conglomerate, and has delivered 20% per annum returns to his lucky stockholders since 1965. The S&P 500, meanwhile, has provided annual gains of about 9%.

Anyway, Warren Buffett issued a remarkable statement last month. He declared: 

"[The] Board of Directors has authorized Berkshire Hathaway to repurchase Class A and Class B shares of Berkshire at prices no higher than a 10% premium over the then-current book value of the shares. In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than this amount, though any such estimate is necessarily imprecise."

Now this statement also looks extremely promising to me, since Mr Buffett has to my knowledge only ever considered buying back Berkshire stock once before. That occurred during early 2000, when dotcoms were all the rage, Neil Woodford was piling into tobacco shares and Berkshire's stock had collapsed 50% from its previous peak.

Had you bought on Buffett's buyback blessing back then, you'd have tripled your money within the next eight years. The call proves that Buffett, too, knows how to win against the crowd. Berkshire stock traded at $66 just before his latest buyback announcement, and is now $74.

Gurus to mortals -- shares are cheap

So yes, this market remains on a knife-edge, and is ready to plummet on the slightest whiff of bad news. Many investors have already given up and sold out at any old price, just to rid themselves of the ruthless psychological pain. Another month of falls might push even more to throw in the towel.

But old hands such as Neil Woodford and Warren Buffett know it's depressing markets such as these that present the very best prices for sensible buy-and-hold investors.

Both gurus have, in my view, issued the clearest of buy signals for us ordinary punters. For all of the worries of sovereign debts and double-dip recessions, they are telling us there are still businesses out there worth buying at today's low, low prices.

All we have to do, of course, is just summon up the courage and follow their lead. 

If you're still worried about the state of the stock market right now, then I'd heartily recommend you get our latest free special report -- What To Do When The Market Crashes.

More on investing, the markets and the economy:

> The Motley Fool owns shares in AstraZeneca, GlaxoSmithKline and Tesco.

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Comments

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forrado 07 Oct 2011 , 4:50pm

You can also check out what Warren Buffett in person has to say on the matter of buying back Berkshire Hathaway shares in an interview he recently gave on the Charlie Rose Show on PBS at …

http://www.charlierose.com/view/interview/11919

rober00 07 Oct 2011 , 5:24pm

Could not agree more Maynard. I keep buying into the dips in response.

Interestingly people completely capitualing and selling out have started to come to my notice on discssion boards in the last few days.

Interesting Eh!!!!

rober00 07 Oct 2011 , 5:25pm

Sorry "capitulating", dammed computer keyboard.

ANuvver 09 Oct 2011 , 1:37am

Buffett's a fascinating case. On the the one hand, he likes "put the product on the table" kind of investments. On the other, BRK has largely been built out of massive upfront cash generation from the insurance business. On yet another, he's now so big he can do "godfather" deals with investment banks. On one more hand (economists and investors can never have too many hands), he used to handicap bond purchases almost for idle sport.

BRK strategy was always to park revenues in T-bills. My God he was in the right place at the right time. I wonder how long he'll stay there.

Max878 10 Oct 2011 , 3:47pm

I'm 63, retired, no kids, and no longer have much interest in investing for the long-term. I've just sold my 5-year-old FTSE100 tracker, which represents about 1/2 my shareholdings, in order to take advantage if the FTSE plummets which I think is likely. If it doesn't then I'll invest some of it for income. I haven't had a holiday for eight years, so I'll spend the rest in search of some sun (if I can afford the travel insurance).

kman2525 10 Oct 2011 , 5:47pm

Only the experts got out in time, but the rest of us are still holding on and hoping, so your recommendations are worth little as the experts don't need your advice and the rest of us haven't the cash to take advantage of these "great offers". Heigh Ho!

pickepics 10 Oct 2011 , 6:10pm

The FT's market historian David Schwartz was adding griss to your mill this weekend, Maynard. See http://www.ft.com/cms/s/0/eee7725a-f01b-11e0-bc9d-00144feab49a.html

Seeing a few promising results from headhunters and recruiting companies, a lead indicator, may be an indication that we are now bumping along the bottom rather than falling further.

goodtyneguy 10 Oct 2011 , 8:56pm

Has anyone ever heard of a fund manager who's funds managment group gets paid on the value of AUM turn around and say the stock market is crap at the moment so don't invest now?! Or an investment tips service letter writer for that matter?

"Both gurus have, in my view, issued the clearest of buy signals for us ordinary punters. For all of the worries of sovereign debts and double-dip recessions, they are telling us there are still businesses out there worth buying at today's low, low prices."

That's why Buffet is buying back his own shares rather than investing in "businesses out there worth buying".

Thanks for the link forrado.

ANuvver 13 Oct 2011 , 8:04pm

goodtyneguy:

Wayaye!

I'm also a bit concerned that "Warrant" Buffet seems to be interested in scooping back up his own company. But all he has so far is a mandate to do so, within clearly defined limits. He's latterly been very careful about the impact his actions can have on markets. We'll see.

Having said that, he's just made an audacious move on BofA. He's been spending reputation capital, which is very important to him.

I note with a quiet sense of Schadenfreude that some of those market tap-dancing hedge funds have ballsed it up recently on both commodities and equities. My heart bleeds. Only one Porsche for Christmas this year...

Wuffle 16 Oct 2011 , 12:13pm

Both gentlemen referenced in the article are clearly good and I am respectful.
I'm broadly in agreement with the article, but think other factors are evident here as well.

The key point about Mr Buffett is he's old (so is Soros). Being better than average for miles longer than average works a treat.
Mr Woodford has been a solid contrarian but stands out most for the size of stick he wields.

Make steady decisions and keep going and you'll be fine. It isn't rocket science, and don't let anyone charge you as if it is.

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