Monday, June 13, 2011

Be greedy when other are fearful

When I first started investing, the movements of the market had a very real, visceral impact on my wellbeing.  If the market was moving down for any significant stretch of time, I would start to get worried.  Not because the fundamentals of my companies were bad, or because of any other sign, but a badly performing market can feed into itself.  Nobody likes to see a constant stream of red throughout the day, day after day.

So the last 6 weeks would have been rather disconcerting to me a few years ago.  Yet I am not worried, I'm more excited.  Today I sit in a much better financial state than I did when I first started investing- my expenses are exceeded by my investment income and I am ready to be bold.

But being bold at any price is cause for danger as well.  And it is possible that these prior six weeks have been a portent of more ominous things to come.  And it's true, the housing market is not pretty, and a variety of economic reports have similarly proven unpleasant.  But one thing is clear- equity markets are down and stocks are cheaper.  A true value investor gets excited by this prospect.

It is very difficult to rewire your brain to buy low and sell high.  For new investors, this seems obvious--yet time and time again, people do the exact opposite.  This is a human failing.  We attempt to discern patterns in things, because for most natural science, patterns are very useful.  When we attempt to discern patterns in finance, things get ugly, because patterns are fleeting.  This is why both chartists/technical analysts and momentum investors alike get a serious spanking.  Even if they are right 9 times out of 10, that 10th time destroys them-- when you fail to approach investing logically, it will catch up with you!

So what is the best way to approach this six week lull?  With a bit of greed, I say.  Remember, we never load all of our money into an investment at once, this is a clear violation of a long-term investing horizon principle.  But if you have been hesitating to buy, now is the time to start nibbling.  For the risk averse, there are some attractive dividend stocks out there that will help pad your income and let you live more comfortably.

But don't be a sheep.  Don't rush into bonds because they're safe just because everyone else is doing it.  There is nothing safe about overpaying for an investment, it is a value destroying act.

On a personal note, I've had some very positive news lately and may be going into business with a famous investor and businessman soon.  I don't know if it is appropriate to mention his name yet here as I have yet to really reveal who I myself am, but it should be an incredible experience and I will keep you guys posted.  See you next week!

1 comment:

  1. Warren Buffett always says be greedy when others are fearful and be fearful whan others are greedy.