"Be Fearful When others are Greedy and Greedy When Others are Fearful" - Warren BuffettThe above quote, from investing legend and current world's richest person (Forbes), Warren Buffett, is a clear allusion to the well-established view that investors' actions are largely driven by psychological factors of fear and greed. Past analysis strongly supports that most decisions and actions of investors do not draw from very rational evaluations but rather the overwhelming feeling of the moment. Most times, those feeling are those of greed (when the market is booming, and fear (when the market squeezes them a bit) and are largely in response to market noise. In the end, very little of the results derives from clear-headed thinking. The effect is that many fail to achieve the full potential of their invesing effort. Incidentally, these sentiments are often widespread. The bankwagon effect tends to ensure that most of the market participants run with the same current. That's probably a good reason many would get caught on the wrong side of the market when reversals occur. The admonition from the legend here is to be a bit contrarian and avoid a "follow-follow" mentality. In the market, as in many other circumstances, the majority won't necessarily be right. While that doesn't simply mean you must take the opposite of what direction the market moves, it does recommend a level of independent thought. It means applying your common sense, especially when it strongly runs counter to what the generality of the market seems to be acting out. The logic of this view, you would see, lies in the fact that when the tempo is strong in a given direction in the market, many investors just follow the noise and trail the actions of the market. Take a booming market. Everybody wants the boom, and the desire would be that it lasts forever. Warren Buffett obviously wouldn't recommend that an investor turns his back on the good fortune of the moment. Independent thought, however, demands that when the boom drives prices to levels that clearly begin to look unrealistic, an intelligent investor should sit back and think properly. If market prices can no longer be supported by the fundamentals of the market or specific companies, it would be time to act differently, irrespective of the din of the market. When the greed gets intoxicating, remember that nothing lasts for ever and nothing can come from nothing. That's when to protect your investment and earnings. That picture can be reversed in a declining market as has been our lot for some time. Fear grips the market and the tendency is to dump and salvage what you can. More dumping means more falling prices, which eventually pushes prices to levels that may prove a rare opportunity. Yet fear will keep many out of the market. Until they have seen the market bubbling again, the desire to participate simply takes flight. Yet that situation of widespread fear, dumping and price crash, is the unique opportunity the seasoned players latch on to. That's why he recommends getting greedy at that point, rather than join the bandwagon of fear and flight. The "Oracle of Omaha"said so, and he has been so successful in his own game. Can anybody doubt him? Think about it.
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