Investors continue to seek safety

Warren Buffett, CEO and chairman of Berkshire Hathaway
Nicholas Kamm/AFP/Getty Images
(MoneyWatch) Warren Buffett once said this about market timing: "Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient." Unfortunately, it seems that investors are still harming themselves by ignoring his call for investor patience. 

The price-to-earnings ratio of the S&P 500 Index is now around 14 (its historical average), while the return of one-month Treasuries is around 0 percent (when its historical average is around 3 percent). These figures indicate that the equity risk premium, or the expected return of stocks above riskless one-month Treasures, appears quite high compared with the historical average.

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According to the Investment Company Institute, however, domestic U.S. equity mutual funds experienced net cash outflows of more than $500 billion from the beginning of 2007 through April 2012. At the same time, investors poured over $1 trillion into bond funds, more than doubling those assets. And these trends continued even after the bear market ended in March 2009 and the S&P 500 Index proceeded to double.

This shows that investors are tremendously averse to risk at a time when the equity risk premium is quite a bit larger than it has been historically and bond yields are at lows not seen in more than 50 years.

Is this an intelligent strategy? Let's see what Buffett has to say on the subject:

"If [investors] insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."

Buffett certainly eats his own cooking. While investors were reacting to the ongoing European debt crisis by withdrawing almost $100 billion dollars from stock funds over six months ending October 2011, Buffett's Berkshire Hathaway (BRK) invested almost $24 billion in stocks. It was the company's largest commitment of new cash in at least 15 years.

If you've been moving funds from stocks to bonds in an effort to time the market, ask yourself if you think you're better off following your old pattern or taking the advice of the person most consider the greatest investor of our generation. Even smart people make mistakes. What differentiates them from fools is that they don't repeat them.

  • Larry Swedroe On Twitter»

    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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