Investors might want to take a cue from Warren Buffett, one of the most successful investors in history, who lately has been buying stocks—and companies.
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It’s hard to economically describe the current market environment and investor sentiment, but horripilation comes close. The mid-17th century word describes hair standing up on the skin due to cold, fear, or excitement.
Many investors are experiencing that sensation as it becomes clear that the mighty “Fed put” that long supported the stock market is expiring. The stock market has to stand on its own—and it is having a hard time maintaining its equilibrium.
The charts of many stocks reveal that trading patterns are spiraling lower. The lofty valuations stocks have long enjoyed in a low-rate, high economic-growth environment are falling back to earth.
It’s hard to identify signals from noise, but recent comments from two great investors are worth pondering.
Paul Tudor Jones, the macro hedge fund manager, told CNBC recently that the financial environment was so bad “you don’t want to own bonds and stocks.” Jones was famously positioned short before the 1987 stock market crash, and he has been much admired ever since.
Warren Buffett, one of the most successful investors in history, is actively buying stocks—and companies. At 91, an age when most people have long since slowed down, the billionaire remains an apex predator when it comes to stocks. “We depend on mispriced businesses through a mechanism where we’re not responsible for the mispricing,” he said at the recent Berkshire Hathaway annual meeting.
What does this mean for you? If Jones is getting dour, and Buffett is getting greedy, investors should think about getting into the act. But when?
When you are so afraid that it seems as if the stock market is facing impossible odds, you have likely identified a market bottom—or at least the start of your own personal bull market.
The uncertainties are elevating fear premiums in the options market, and creating rarely seen, if intriguing, conditions. The Cboe Volatility Index, or VIX, was recently above 30. The VIX is so often mentioned that it might seem like an impotent indicator. But readings above 30 are relatively rare—among the top 4% of all readings historically. In the past five years, the VIX has rarely been that high—notably in response to 2020’s initial Covid-19 outbreak—and short-lived.
In other words, the stock market may not be able to handle uncertainty, but the options market loves indecision and anxiety. Fear premiums swell as investors actively buy puts to hedge stocks and portfolios. The weakness in stocks, coupled with the demand for calls as stock proxies, keeps greed premiums elevated, and boosts fear premiums.
The world will always need banks, drug companies, technological innovation, machinery, cars, and so forth. Look around your house and office. Compile a shopping list of solid businesses you want to own, or look to add to your current holdings.
If you can’t decide on one stock, consider buying the SPDR S&P 500 ETF Trust (ticker: SPY) and curating the position with options. When SPY was around $429, the June $305 put that expires in 2023 could be sold for $9. The put sale expresses a willingness to buy the S&P 500 at an effective price of $296, a price last seen in August 2019. The June $500 call that expires in 2023 could be sold for $10, too.
The short strangle—selling a put and call with different strike prices but similar expirations—expresses a willingness to buy low and sell high. In other words, the options market can help investors make disciplined investment decisions while monetizing investor fear and greed.
Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in this column.
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