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Turning Fear into Opportunity

During any given time period, either greed or fear drive investment prices up or down depending on the mood of the majority of investors. During 2011, various global events have continued to weigh on investor confidence as the world watches and waits for the U.S. economy to regain it's prominence as the world's primary engine of growth.

For many global investors, the riots in Britain, the financial turmoil of the Eurozone, and the expanding pockets of political strife in the Middle East are no longer just outlying incidences that happens elsewhere; they're fast becoming a glimpse into turmoil that could just as easily occur in their own nations.

Whether it is a latent realization that things often get worse before they get better, or a herd's reflexive sense of smell, during times of heightened uncertainty, fear usually envelopes the investment markets and irrationality, once again, drives them into a tailspin. Enter Warren Buffett...

An icon in the world of investing, his age-old axiom, Be fearful when others are greedy and be greedy when others are fearful,? has proven to be more than just a popular catch phrase. Yet, few investors actually heed the advice of the world's most successful investor, and he knows it, which is why he became very greedy during this summer's market volatility. He recognizes that fear is instinctive, intense and immediate which makes it extremely difficult for mere humans to overcome. As tens of billions of dollars fled global stock markets during the most recent bout of volatility, he's been busy buying stocks like it's a fire sale at the local mall. After the stock price of the largest US bank sank to a recent low due to lack of investor confidence, sensing another unique buying opportunity Warren Buffett stepped in with a $5 billion dollar investment.

What differentiates Buffett from most investors is that he doesn't buy stocks, he buys companies. He sees the world as a constantly expanding economy with certain key industries and companies better positioned than others to capitalize on the shifting supply and demand of the emerging global marketplace. He buys based on pure fundamentals the underlying drivers of a company's earnings potential and ignores the technical underpinnings of the markets. His experience, built on cool logic and unwavering discipline, tells him that, during times of economic distress, the fundamentals don't move the markets in the short-term; rather investor expectations do. And, during the most recent quarter, most investors have been expecting the worst. But, the fundamentals haven't changed.

Buffett is not a billionaire 50 times over because of the decisions he makes during bull markets. His uncommon success is derived from the actions he takes during bear markets. Case in point: In 2008, just as the last small investor exited the market, Buffett began his buying spree. He bought stocks that were still on the way down well before the market bottom in March of 2009. The lower prices went, the more he bought. Then, as his portfolio rode the wave of one of the greatest stock market recoveries in history, 80% of small investors sat on the sidelines. It wasn't until the market had recovered nearly 75% of its losses did small investor capital begin to flow back in.

It's far too easy, and, perhaps a bit disingenuous to try to compare ourselves to Warren Buffett. If we had billions of dollars in our portfolio we too would be far less fearful, and if what he has accomplished was easy, there might be more billionaire investors. But, he didn't always have billions. What he has always possessed is the ability to see fear as an opportunity, and the willingness to capitalize on it.

Unfortunately, the lessons of Buffett seem to be revisited only after fear has already gripped the markets and the damage has been done. But, it's not too late for everyone to tap into their inner-Buffett? and prepare for the next big opportunity, which may, in fact, lie just ahead. If Buffett is right, and he's been more right than wrong, the global marketplace will continue to expand in geometric proportions. If it's not happening here in North America, it will happen in emerging markets such as Asia and Latin America, and it will largely be North American multinational companies driving the productivity of those regions.

Money, and the prospect of losing it, is the root of investor fear and irrationality. Because money can be easily exchanged for stocks, and stocks are easily convertible back into money, it is a natural tendency for people to equate their stock portfolio with money. The ultimate lesson to be gleaned from Buffett is to not think of your stock portfolio as money, but, rather as a piece of that global marketplace. Stock prices, therefore, reflect a company's valuation in the context of its ability to operate profitably in that global marketplace. The fact that stock prices can be driven down by irrationality only magnifies the opportunity for investors who recognize that a company's fundamentals haven't changed.

This is not to suggest that investors can simply forge ahead without some feeling of trepidation. After all, fear is nature's way of protecting us from potential harm. It's the reaction to fear, often characterized simplistically as fight or flight? that produces the actual consequence, which, for many investors, translates into realized losses. For investors with properly balanced portfolios and who invest in solid companies with strong balance sheets, low valuations and the right exposure to global markets, it's the fear of missed opportunity that should dictate their actions.


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