MW Warren Buffett's sage advice about fear and greed is a trap in this market
By Mark Hulbert
Instead of buying more stocks when volatility rises, you should sell
Be greedy when others are fearful? Not so fast.
Contrarian investors recently have been buying more stocks as the market's "fear gauge" has climbed. History is not on their side.
Their instinct is to follow famed investor Warren Buffett's classic advice to be greedy when others are fearful. And fear definitely has gripped the stock market: At one point earlier this week, the Cboe Volatility Index VIX- Wall Street's "fear index" - jumped to more than 35, almost double where it stood before the U.S. and Israel launched their bombing campaign against Iran two weeks ago.
What these contrarians are overlooking is that, even though high VIX levels can be bullish, the stock market will have fallen in the process of the VIX reaching that high level.
To argue that high VIX levels are bullish is therefore no more helpful than declaring that a bear market is bullish because the market rises once it's over. Translating Buffett's comment into a VIX-based market-timing strategy is not so straightforward.
The data in the table below help to make this point. It divides all trading days since 1990 into four quartiles according to where the VIX closed on each day, and for each quartile reporting the stock market's average total return over the subsequent month (as measured by the Wilshire 5000 Index XX:W5000FLT).
Notice that the stock market's average subsequent return in the lowest quartile is higher than for either the second or third quartiles. Moreover, the stock market's risk-adjusted return is below that of the lowest VIX quartile.
Volatility timing
Many on Wall Street have implemented sophisticated VIX-based trading strategies. (One such approach was outlined in a recent MarketWatch column.) But here's a simpler approach that historically has beaten the market on a risk-adjusted basis: Instead of increasing your stock holdings when the VIX rises, you sell. You would then wait for the VIX to start declining before beginning to restore your equity exposure.
That is the mirror opposite of how many contrarians are currently reacting to the VIX. This counterintuitive use of the VIX was the basis of a study several years ago entitled "Volatility-Managed Portfolios." A simple market-timing model outlined in this research has beaten the stock market over the past three decades on a risk-adjusted basis - and, perhaps even more significantly, in real time since the paper was published.
A user-friendly way of following this market-timing model is to follow these two steps at the beginning of each month:
-- Pick a target equity allocation (such as 75% in equities and 25% in a money-market fund) that corresponds to the median historical VIX level (which is 17.59).
-- Your equity exposure level in any given month is calculated by multiplying your target allocation by the ratio of the VIX median to the closing VIX level of the preceding month.
If the VIX at the end of March is where it closed on March 12 (27.29), your equity exposure level for April would be 48.3%, well below your target equity allocation of 75%. Instead of reacting to higher VIX levels by increasing your equity exposure, in other words, the profitable course of action would be to significantly decrease it.
For once, therefore, our emotions point us in the right direction, since our instinct is to sell stocks in reaction to greater volatility. To be sure, reacting in that way is contrary to what advisers typically tell us to do. But at least when it comes to high VIX levels, their advice is wrong.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
-Mark Hulbert
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(END) Dow Jones Newswires
March 13, 2026 16:12 ET (20:12 GMT)
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