Should you be greedy when other investors are fearful?

Buy counter-cyclically. That’s what many ‘experts’ are suggesting.

In fact, Warren Buffet is famous for saying “be greedy when others are fearful and be fearful when others are greedy”.

But this strategy is not foolproof. Sometimes it works and sometimes it doesn’t.

Some brief history

After massive price growth for over five years, the Sydney and Melbourne property markets are taking a well-deserved breather. The news of falling auction clearance rates, stagnant real estate prices and a possible market top is making some potential buyers worried. They see difficult times ahead. They are waiting on the sidelines for the picture to become clearer.

While they are fearful, other strategic investors are taking advantage of the softer market to buy the property they would have had to fight strong competition for at auction to acquire six months ago.

These investors understand when they look back in five or ten years time they’ll wonder how they bought these investment-grade properties so cheaply. They know growth in the economy, jobs and population surrounding their property will underpin its long term growth. I guess they’re being greedy while others are fearful and they are creating their own good fortune.

You can’t always rely on this strategy

‘Buy when others are fearful’ doesn’t always work. Ask those who bought properties in Perth, Darwin or in many regional locations over the last few years, believing these markets had bottomed. It’s much the same for those who looked for distressed properties or chased the next hot spot.

Some of these markets haven’t yet bottomed. Other will remain flat for a long, long time before they start rising again. You see, markets don’t suddenly rise after they fall.

They usually plateau for a number of years, as vendors slowly put more properties on the market after realising buyers are returning. Some mining towns and regional markets will not have another growth spurt for decades – they have more properties than there are people who will ever want to live in them.

This type of speculating has meant many buyers missed out on the strong growth experienced in locations like our two big capital cities which were underpinned by multiple growth drivers.

The bottom line

We are moving into the next phase of the property cycle and at times of change it is common to get mixed signals and conflicting messages from the “expert” commentators. Those property investors who follow a proven strategy, one that has worked in the long term over multiple cycles will do well as they become greedy when others are fearful.