Consider the following, real life, example of comparative returns (for which I am indebted to Kokkie Kooyman of Sanlam Investment Management). Imagine you invested $10,000 into shares of Warren Buffett's now legendary holding company, Berkshire Hathaway, at the end of 1971. Then imagine you (or better still, a sibling, or friend) invested $10,000 into the S&P 500 Index. The table below shows how your investments fared.

[Ed note]: I am unable to reproduce this table from the letter but you will get the gist from the paragraphs immediately above and below.

Where to begin? The raw data suggest that Buffett had a miserable 1973/74 Crash. Our hypothetical end-1971 investor would have seen his pot invested in the S&P 500 depleted down to $7,456 by 1974. But his shareholding in Berkshire Hathaway would have underperformed even a lousy market, with a value of just $5,708. Many investors would doubtless have thrown in their hypothetical towel by this stage. It gets worse. By 1975, the broad stock market had recovered its losses, and was trading at a value back above the initial $10,000. Berkshire Hathaway stock, on the other hand, was down even more, to a value of just $5,422. Those investors who didn't cash in their chips in 1974 would have been sorely tempted to do so by the following year.

Sanlam's Kooyman cites Shelby Cullom Davis, diplomat and investor:

"You make most of your money in a bear market, you just don't realize it at the time."

The tone of Buffett's 1974 chairman's letter to shareholders of Berkshire Hathaway is sober, but neither panic-stricken nor defeatist. Buffett was simply sticking to his knitting and maintaining the business for the long run.

There is a quote from author John Naisbitt that aptly addresses the problems facing the modern investor:

"We are drowning in information but starved for knowledge."

David Fuller's view The two quotes above are also apt.

In the stock market run up to the year 2000, conventional wisdom among conservative investors favoured a buy-and-hold strategy. This policy was queried early on in the new millennium and following the meltdown in 2008, the consensus has favoured active management.

Is this now the best strategy, or might buy-and-hold still have considerable merit? My answer is yes and no, depending on circumstances.

For instance, in a bull trend, active trading is very unlikely to outperform buy-and-hold, as we saw last year, unless one uses leverage which considerably increases risk. Also, while the ability to trade is a useful skill, it is not for everyone due to a steep learning curve plus the time and effort required. Even if one aims to be a medium to longer-term trader relying on charts and moving averages, it can be emotionally exhausting, including during the good times.

Since stock markets have historically gone up more than they go down, should conservative investors regard two severe bear markets within eight years as a statistical aberration and re-embrace buy-and-hold? My answer, heavily qualified, is possibly, subject to selection, and there is also one obvious time, as market history shows us, when we should cash up.

Starting with selection, Warren Buffett began investing on behalf of Berkshire Hathaway when the USA was very much the established and still ascendant economic power, with a strengthening capital base and cutting edge technology in most sectors. I wish the USA well but few realists would say that the country has the same ascendant strengths today. Neither does any other OECD country. Therefore, my choices of buy-and-mostly-hold candidates would strongly favour the Fullermoney secular themes of emerging Asia and its emerging suppliers of resources - energy, metals, other industrial commodities and foods.

However, not all of us who are planning and monitoring our investment strategies today have the luxury of 40 more years in which to achieve super profits, as we have seen with the Warren Buffett example above. We know that bubbles burst and bear markets occur. Therefore, our long-term planning should include scale-up selling when market performance really does appear too good to be sustainable.

Inevitably, there is a judgement call in this assessment. So I am not talking about a sharp short-term run up which is temporarily overextended. I am not talking about a nine-month recovery following a bear market, as we saw last year. If we jump at every shadow of a correction, of short or medium-term duration, we really will be keeping our profits small relative to the potential. Instead, I am talking about bubbles, usually defined by high valuations, accelerated multiyear uptrends and euphoric crowds. If we do not commence scale-up profit taking in those conditions, we risk at least two or three years of underperformance as markets fall back in bear trends (think 2008), build bases and then rise again, often to new all-time highs.

Lastly, and in reference to Cullom Davis' quote above, Warren Buffett and most other legendary investors made their biggest profits by purchasing equities when everyone could clearly see that they were in a bear market. Sadly, too many inexperienced and emotional investors sell when a bear market is obvious, because they are influenced by the crowd and various Cassandras. Consequently, they are worrying about remaining risks, which may only be short-term, rather than focussing on medium to longer-term recovery potential.

Presumably everyone knows the adage: 'Buy when there is blood in the streets." Unfortunately, few investors find themselves able to do this because they are paralysed by fear. At such times, we should remember that we can also become our own best contrary indicators. In terms of timing, one really should commence buying on evidence of climactic selling. If we wait for clear evidence of market recovery, prices will be considerably higher.

Today, we can see that a global stock market correction is underway, following a recovery of more or less nine months last year. Markets ran ahead of themselves, as we could see from the overstretched moves above 200-day moving averages, so often illustrated on this site. However, it would be a real stretch of the imagination, in my view, to call recent conditions a bubble.

Now that many favoured markets have reacted towards their rising MAs, I regard the current environment as a buying opportunity. This does not mean that there will not be better opportunities in the event of a deeper correction. One simply does not know until after the event. Therefore, from a long-term perspective, conservative investors with cash may wish to commence a programme of scale-down buying.