03/28/2008 02:45 am ET Updated May 25, 2011

Bad Market? Do As Buffett Does

This is one ugly market.

That ugliness shows up in the averages, with the Dow down 4% since mid-October, but it's much worse in individual stocks. Stocks that were considered solid, conservative picks are getting killed.

Citigroup (NYSE: C) and Morgan Stanley (NYSE: MS) are more than 40% off their 52-week highs. Freddie Mac (NYSE: FRE) looks more like Freddie Krueger, slashing investors by more than 50%.

What's a conservative investor to do when confronted with these nightmares? I'd start with a trip to the Oracle, a.k.a. Warren Buffett.

What he says
On one hand, Buffett says that Rule No. 1 is to never lose money. This is a low blow to investors who believed that Citigroup and Freddie Mac were conservative investments. As it turns out, Citigroup and Freddie had significant unknowable elements. That's why, to follow Buffett's advice, you need to know exactly what you're buying and demand a significant margin of safety when buying any stock ... regardless of its reputation.

That would seem to preclude buying shares of these financial stocks today. There are so many unknowns. But then Buffett says of Berkshire Hathaway, his company, "Berkshire buys when the lemmings are heading the other way."

In other words, when everyone else is panicking, that's exactly when you want to be buying. And that would lead us to believe that now is the time to start picking up shares of these financial names.

Read more on Motley Fool