Be Fearful When Others are Greedy and Greedy When Others are Fearful

By Nathan Mercieca

What makes people tick? The psychological framework of a human being is a perplexing phenomenon in modern society that grasps the interest of people all around the world. Such mental aptitude towards investing in various types of securities is an area which many investors seldom take the time to educate themselves about.

Photo by Morgan Housel on Unsplash

Warren Buffett

As one of the greatest value investors of our time said:

“Be Fearful When Others are Greedy and Greedy When Others are Fearful” — Warren Buffett

Born and raised in Omaha, Buffett bought his first stock when he was a mere 11 years old. Ever since then, he has been on the rise as one of the most successful value investors. His investment firm, Berkshire Hathaway, retains a portfolio of over 60 companies with a total market capitalisation of approximately USD$604 billion at the time of writing.

Warren Buffett by Josh Machamer

Buffett’s mentor, Benjamin Graham, author of the coveted book ‘The Intelligent Investor’ was the pioneer of value investing. Such book outlines the simple methodology that is needed to invest in the stock market. Graham’s investment philosophy is to purchase companies/shares in companies when their market price is lower than their intrinsic value.

Behaviour of Common Investor

Graham also emphasised the importance of distancing yourself from the hustle and bustle of daily market news. The reason being is that when investors witness peeks or troughs in the market, their mental state is equivalent to a pendulum, swinging from side to side in a never ending state of uncertainty.

Pendulum by Rob Fishman

Such lessons of neutrality were on-boarded by Buffett with great enthusiasm as he went on to become Graham’s most successful students.

Moreover, the tendency for ordinary investors to seek out short term returns as opposed to long term prosperity is largely connected to the concept of herd mentality and the Fear Of Missing Out (FOMO).

Herd mentality refers to the compounding effect that one person’s actions have on the masses. For example, if investor A decides to buy/sell a large portion of shares in company X, then investor B who heard about such buying/selling would then become concerned as to why they, themselves are not buying/selling their own shares of company X. This is despite investor B’s lack of knowledge as to why investor A even bought/sold the shares. Such lack of clarity and sporadic decision making causes a considerable volume of chaos in the market.

Furthermore, FOMO flows from herd mentality. The reason being is that as people see others amassing their actions in unison, the remaining population start to fear being left out. Therefore, such Fear Of Missing Out and being separated from society creates a tendency for investors to disregard their previous analysis of the market and ‘jump on the bandwagon’ to become like a herd of sheep.

Photo by Leo Foureaux on Unsplash

Consequentially, the market would be thrown into pandemonium as people attempt to gauge what others are doing and hence, follow suit. This further compounds losses that short term investors incur. Moreover, due to their incompetency to maintain their composure during a tumultuous period of volatility, their long term returns would be severely damaged.

Polar Opposite Reaction

This brings us to the essence of the article’s title, ‘be fearful when others are greedy and greedy when others are fearful’.

Photo by Lucas van Oort on Unsplash

Be Fearful When Others are Greedy: When there is a sudden increase in market optimism, share prices skyrocket due to demand outstripping supply. When companies become overpriced (i.e. overvalued), it directly contradicts the concept of value investing. Henceforth, the intelligent investor is to refrain from investing in such market because the greed of uneducated investors is enough reason for the intelligent investor to become fearful of overpriced securities and economic conditions.

Be Greedy When Others are Fearful: On the other hand, when there is a sudden decrease in market optimism (i.e. market pessimism), share prices take a dive due to people unloading (selling) their shares. When companies become undervalued, this is the prime environment for value investing to be implemented. Therefore, the intelligent investor is encouraged to invest during such market conditions because the fear of uneducated investors is enough reason for the intelligent investor to become greedy of undervalued securities.

Concluding Remarks

Buffett’s tenacious and neutral, yet attentive attitude towards investing has paved the way for many other like minded individuals to follow suit. Personally, I have been implementing such investment philosophies, especially and maintaining a level head during volatile market events. The Zen-like mindset whilst investing is an essential tool to have in your financial toolbox.

Written By: Nathan Mercieca

Disclaimer: The preceding article shall not be utilised as investment advice. The opinions and views of the writer are entirely his, and his alone. They are not an invitation to partake in such investment activities.