Stocks crashed and the VIX exploded in a single session, but Buffett’s rule hides an overlooked word that changes how it applies. Bespoke’s examination of 19 similar panics reveals a surprising distribution between the following month and the following months.
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On Thursday, Wall Street’s fear gauge saw its biggest one-day change in about a year and a half. The Cboe Volatility Index, or VIX, closed at 28.18 on Nov. 5, up 11.57 points from 16.61 on Wednesday. The VIX uses S&P 500 option prices to measure the level of volatility traders expect over the next 30 days, which is why it’s called the fear gauge. CNBC, citing Bespoke Investment Group, reported that this was the largest single-day move in the VIX since the April 2025 “Liberation” week in pricing.
Stocks fell at the same time. THE SPDR S&P 500 ETF (NYSEARCA: SPY) fell 4.41% on Thursday. Hedgeye said the S&P 500 posted its biggest one-day decline since April 3, 2025, and the NASDAQ 100 fell 6.5%.
Warren Buffett’s most famous line on market psychology comes from his 1986 letter to shareholders: “Our goal is more modest: We simply try to be afraid when others are greedy and to be greedy only when others are afraid.” »
Most people cite a shorter version that removes the word “only.” This word makes the rule more conservative. In Buffett’s version, greed is the exception and requires widespread fear to justify it. The same article also limits the scope of the rule. Regarding fear and greed, he wrote that “we never try to anticipate the arrival or departure of either disease.” He added that he had “no idea” whether the market would “go up, down or stagnate in the short to medium term.”
What the 19 fear peaks over the next six months show
CNBC’s Oliver Renick cited a Bespoke study covering the 19 times since 1990 that the VIX rose at least five points from a starting level below 20. Three months after those spikes, the median return for the S&P 500 was 4.2%, and the index was higher 68% of the time. At 6 months, the median return was 4.8%, with gains in 79% of cases.
The first month was more difficult. The median one-month return was 2.1%, but the average was negative 0.4%. Significant declines after a peak in 1990 and another on February 24, 2020, at the start of the Covid sell-off, brought the average down.
Bespoke co-founder Paul Hickey explained the pattern this way: “These kinds of abrupt spikes from placid levels are like a line of thunderstorms passing through in summer. The sky darkens quickly and the wind gusts, but the loudest thunder and brightest lightning don’t last long.”
Keep limitations in mind: Nineteen events is a small sample size, and 2020 showed that a spike can be the start of something much bigger. Past results are no guarantee of what will happen this time.
Options traders were always positioned to face more difficulty
Buffett’s reign depends on the fear of other investors, and Thursday’s options trading showed plenty of fear. CNBC, citing SpotGamma, reported that traders in VanEck Semiconductor ETF (NASDAQ:SMH) were still bearish at the close. Of a total of 900,000 options traded, 670,000 were puts. Puts are contracts that gain value when the underlying asset declines. Put options also accounted for $1.5 billion of the $1.7 billion total premium. The massive put buying in chip stocks reflects real concerns about some of the biggest names in the market.
What long-term investors can learn from a fear spike
- The peaks of fear have generally faded. In Bespoke’s data, stocks were higher six months later in most cases.
- The next few weeks may still be difficult. A negative average return over a month means that some of these episodes got worse before they got better.
- Discipline matters more than timing. Buffett himself said that he never tried to predict when fear would come or go.
For an ordinary long-term investor, the useful lesson is perspective. In the coming weeks, watch to see if the VIX returns to calmer levels or continues to rise. Also look to see if chip stock options traders continue to favor puts. Buffett’s rule cuts both ways, and we’ve laid out the complete strategy for overcoming a mania and knowing when to exit in a free handbook here: The Bubble Survivor’s Handbook.
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