Greed, Fear or both?
Turn on a business channel (CNBC equivalent) on TV and, almost without fail, someone will be predicting that the market is getting ready to (a) soar, (b) crash or (c) remain in a trading range. And these 3 predictions could well happen in the same program when there are more than one ‘experts’ giving their opinions! Predictions are also available in abundance on interest rates, dollar, oil prices, gold prices, you name it. In our first article we mentioned how good these experts are at predicting.
Nevertheless, when the expert on TV mentions their ‘best pick’, everyone listens hard. Greed rules at this point in time. Further, in certain market conditions where everything you buy is going up, one might attribute this success to the wise expert when actually its not.
And that’s when the tide turns. For reasons out of the expert’s control, the markets turn sour and there are more sellers than buyers. More people, in effect, have fear. And they wish to sell FAST. Basic Economics says that when there are more sellers of anything than buyers, the price of that product will decline. Ditto for the price of a share.
Markets, they say, are ALWAYS ruled by fear and greed. And while we suspect that there may be an element of oversimplification in this statement, most of the time, they truly are. That’s probably because everyone is in it to make money (stating the obvious!) and there are 2 findings of Neuro-economics that shows how the human brain reacts to gain and loss:
First: Research shows that the neural activity of someone whose investments are making money is indistinguishable from someone who is high on cocaine. An unexpected gain fires up the brain (neurons go from firing 3 times a second to 40 times a second). That explains the Greed.
Second: As we have mentioned in one of our earlier articles, research has also shown that financial losses are processed in the same area of the brain which deals with mortal danger. This explains the fear.
You might be saying to yourself that greed and fear will never get in the way of your trading, but believe it or not they will be. All of us have some combination of these emotional forces.
Hindsight being a 20:20 vision, you could well look at a chart with periods of stock market lows and highs and say that well, what one should do is to ignore these conditions as long as the stock you hold is a good one. Easier said than done – because you already know how it turned out. But think of the next 20 years, say through to 2028 and you will realize that you have no idea how an investment in the market will turn out. That’s when uncertainty strikes the mind. That’s why they say that there is no risk in the past. The only risk you face is in the future.
What’s the lesson here?
Here are two quick tips to handle this: First; if you are likely to need money for something like a down payment on a house or for kids’ education etc., within the next 24 months, get that money out of the stock market. And if your goal truly is to achieve results in five years or 10 or 20, don’t measure and judge your success every day, every week, every month or every quarter.
The longer you have before you’ll need to use your money, the less you need to be concerned about what’s happening to it this very day. If you own a home and you don’t want to sell it, you will understand that daily or weekly or monthly changes in the market value don’t mean much to you. See if you can adopt the same attitude about your investments.
By extension, always avoid leverage or debt to buy stocks. Nor speculate. Essentially, never should there be a need to sell in distress.
Second: in his book written in 1951, Graham reiterates that an investor’s essential ally is the Price – as long as the price is low enough, one is far better off in avoiding reference to a market quotation for the stock on a regular basis. He further advises the motto; Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop. (Simple but far reaching advice for its time!)
Before we end, we cannot avoid the temptation to quote Warren Buffett who epitomizes the dispassionate investor. His 1986 Chairman’s letter states thus:
“When conditions are right that is, when companies with good economics and good management sell well below intrinsic business value – stocks sometimes provide grand-slam home runs. But we currently find no equities that come close to meeting our tests. This statement in no way translates into a stock market prediction: we have no idea - and never have had - whether the market is going to go up, down, or sideways in the near- or intermediate term future.
What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics
will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
What’s the lesson here?
Here are two quick tips to handle this: First; if you are likely to need money for something like a down payment on a house or for kids’ education etc., within the next 24 months, get that money out of the stock market. And if your goal truly is to achieve results in five years or 10 or 20, don’t measure and judge your success every day, every week, every month or every quarter.
The longer you have before you’ll need to use your money, the less you need to be concerned about what’s happening to it this very day. If you own a home and you don’t want to sell it, you will understand that daily or weekly or monthly changes in the market value don’t mean much to you. See if you can adopt the same attitude about your investments.
By extension, always avoid leverage or debt to buy stocks. Nor speculate. Essentially, never should there be a need to sell in distress.
Second: in his book written in 1951, Graham reiterates that an investor’s essential ally is the Price – as long as the price is low enough, one is far better off in avoiding reference to a market quotation for the stock on a regular basis. He further advises the motto; Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop. (Simple but far reaching advice for its time!)
Before we end, we cannot avoid the temptation to quote Warren Buffett who epitomizes the dispassionate investor. His 1986 Chairman’s letter states thus:
“When conditions are right that is, when companies with good economics and good management sell well below intrinsic business value – stocks sometimes provide grand-slam home runs. But we currently find no equities that come close to meeting our tests. This statement in no way translates into a stock market prediction: we have no idea - and never have had - whether the market is going to go up, down, or sideways in the near- or intermediate term future.
What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics
will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
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