Fear And Greed


You might have heard Warren Buffett’s saying “Be fearful when others are greedy, be greedy when others are fearful”. Emotions of the mind like fear and greed may preside over rational decision making since you are dealing with money matters when you are buying and selling in the stock market.

Drastic stock price movements will especially affect your emotional state of mind. I wrote about being prepared for the stock market crash but being prepared also means being mentally prepared.

This is in addition to doing your homework in terms stock fundamental analysis, deciding whether a particular company has a strong economic moat, and calculating the intrinsic value etc. After all Value Investing is about buying undervalued but good stocks.

So, do you think you are emotionally strong to stick to your game plan when there is a stock market crash?

Let’s revisit 2008/2009 crash and reference to SPY:

Fear and Greed

From the peak of about $150 to the bottom of about $70, there was a drop of about 55%. Just a quick note here that you notice a recession never stays a recession and will eventually turn into a bull run.

Say you kept your cool and started buying undervalued stocks when SPY dropped to about $120 (a 20% correction). Notice the price actually moved up a little and then started to plunge again, in fact very sharply and quickly.

What would you have done? Would you go through fear, doubt about yourself, your analysis? Would you panic and perhaps you convince yourself to quickly cut loss as the world was really coming to an end?

In fact, the following chart has been used by many to describe different emotions going through the market gyrations.

Fear and Greed Image

Image Source : Moneymindz

I want you to really anticipate the scenarios and be mentally prepared and chart your moves carefully as most likely, this is going to be about the same pattern we are are going to see.

Nobody knows when the crash is going to happen and nobody knows where is the rock bottom.

A few of my own opinions (these don’t constitute stock investment advice and please do your own due diligence):

  • Always stick to the fundamentals and follow the 5-step stock investment framework
  • Progressively attack the market, but always buy undervalued stocks, and build in a margin of safety
  • Only invest with money you don’t have to tap into within a short period of time
  • Stay CALM and don’t panic, you may not catch the trough but markets will always turn

A skilled golf pro competing over 4 days to win a major game needs to be mentally strong, so does the skilful stock investor.

Ending this relatively short article with this video showcasing Tony Robbins and I hope you get further insights from there, you don’t however need to watch to the end.

You can purchase a copy of the book here:

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