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“Be fearful when others are greedy, and greedy when others are fearful,” said one of the world’s greatest investors and Berkshire Hathaway’s chairman Warren Buffett. What did he mean by that, and how can you use that little tip to improve your investing ability? Keep reading to learn more!
Greed and Fear: The Two Emotions of the Investment Market
Greed
Have you ever had a friend or family member invite you to an “amazing” opportunity? All you need to do is buy a “business kit” from them, and then invite people to buy a kit from you, and THEY have to invite people… and so on and so forth. You know how the rest of the whole pyramid or multi level marketing scam works. People know about it, but they still fall for it because of the promise of “easy cash”.
That a bit of how “greed” works in the stock and investment market. Every once in a while you’ll hear about some “amazing” new company or investment that you NEED to buy now since it’s a “sure win” investment. Then, when you actually invest in it, you find out the hard way that it’s really not a “sure win” after all, and then you lose a lot of money.
That happens quite often. We’ll sometimes get some “hot tips” about popular companies and investments and we’ll be tempted to put our money in them. Unfortunately, the reality is that if a stock, fund, or other investment is REALLY good, the large institutional investors (fund managers, bankers, etc.) would have heard about them first. By the time we ordinary people start hearing about those investments, the price would have likely risen far above what it should be worth, and if we do invest in them the price might be on its way down.
For most of us, it’s best to go for the more stable and secure investments instead of speculating on the next big thing. The next time you’re tempted to try and beat the market by investing in some “amazing” new thing, remember what a certain famous hedge fund manager (Michael Steinhardt) warned us about: “that I’m their competition”. Are you SURE you can beat all those experts?
We must never let greed take over our investment decisions. We should always do our research and invest only when it makes sense. We must never waste our money by gambling on rumors.
Remember: If it’s too good to be true, it probably is.
Go slow. The gambling instinct, the effort to make a fortune quickly, a lot of money for a little investment, is the cause of more unhappiness, of the poverty condition in more homes, than anything else I know of.
— Orison Swett Marden, Prosperity: How to Attract It
Fear
After greed, fear is the other main emotion in the stock market (or any investment market). Whenever there’s some bad news or negative rumors go around, you can expect people to start running away from that investment or market and start selling. That drives prices downward. I’ve personally seen that happen to entire economies/countries when I used to trade in the FOREX (currency) market some time ago, and that effect happens to stocks and other investments too.
Because of fear, bad rumors make people sell investments at a loss EVEN IF the investment/companies remain profitable. If the fundamentals (how well the business or investment does its business) are still good, then prices will very likely rise again to reflect the real value of an investment. Unfortunately, if you DID listen to those bad rumors, you probably already sold at a loss AND you missed out on the profit you could have earned if you continued investing in it.
If you let fear take over your investment decisions, you will likely:
- Lose money by believing bad rumors and selling at a loss.
- Refuse to buy great companies at lower prices because you are afraid that their values might get lower (even if the company is still performing well).
- Hold on to falling stocks because you’re hoping it rebounds and you’re afraid of losing profits (even when the fundamentals tell you that the company really IS failing badly).
ALWAYS do your research
Don’t let your emotions control your investment decisions. Invest in what makes sense, and ignore the noise and rumors in the investment market. Buy when it makes sense that you should buy, and sell if it makes sense to sell (e.g. company is actually failing, you’re rebalancing your portfolio, etc.).
When you hear about an amazing new investment or that “everyone” is investing, be wary. That investment might be a bit overpriced by then, and you might lose money buy “buying high” and being forced to sell when the price gets low. It could also be a scam, so do your research!
On the other hand, if you hear that the market is crashing, you should still be wary, but you can now do your research and try to find the good opportunities. Many great companies could have their stock shares discounted by then, and it could be a good time to start buying when prices are cheap.
Be fearful when others are greedy, and be greedy when others are fearful. Either way, ALWAYS do your research.
It is precisely when the market looks worst that the opportunities are the best, precisely when things are good again that the opportunities are slimmest and the risks greatest.
— Andrew Tobias, The Only Investment Guide You’ll Ever Need
I hope you enjoyed this article! Try reading our other articles about personal finance and investment here:
- Conservative or Aggressive? How to Choose Investments Based on Your Risk Tolerance
- Trading Basics: Stock and Forex Trading Terms for New Investors
- What is Diversification and How to Protect Your Investment Portfolio
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