E Buy Fear And Sell Greed

Editor’s Note: The following exclusive excerpt is from the upcoming book, Build Wealth With Common Stocks: Market-Beating Strategies for the Individual Investor by David J. Waldron. The hardcover edition is now available for pre-order in advance of its January 19, 2021, worldwide release. Reprinted with the permission of the author.

Buy or add common shares on surprise socioeconomic events and market fears. Sell or reduce on surprise company events and market greed.

The intelligent value investor purchases a slice of a stable company with strong fundamentals when the market is retreating based on fear, then divests or reduces the holding when the market gets greedy and overbuys the stock despite weaker fundamentals or an inflated stock price when microeconomic events erode the financial strength of the company or the demand for its products and services.

Buy on fear and sell on greed, assuming the share price is attractive or above your cost basis. Erratic market corrections such as the COVID-19 coronavirus pandemic notwithstanding, the market prefers to entertain the purchase of attractive fundamentals at high prices and narrow margins of safety. As a result, in the later stages of the post-Great Recession epic bull market, The Model Portfolio had evolved into more of a watch list than a buy list.

This chapter defines the macro and microeconomic impacts of intelligent investing.

Attempts at Market Predictions is a Fool’s Game

When the market timer is wrong—the probable outcome—in predicting a surprise market, industry, or company event, substantial assets are lost because the trader is too long or short. On the other side of the trade, the patient investor is prepared to take advantage of the surprise occurrence by allocating planned cash reserves for new or increased positions in the shares of companies with strong fundamentals.

The disciplined investor takes advantage of depressed prices from the indiscriminate macro event. These surprise incidents, any tragedies notwithstanding, trigger a contrarian’s opportunity for the thoughtful individual investor. For example, investors who held, added to, or initiated quality positions following the market crash of 1987, during the dot-com bear market of 2000–2002, or the run-up after the Great Recession of 2007–08, profited from subsequent booming portfolios. The market meltdown from the coronavirus pandemic produced similar opportunities for bargain hunters in March of 2020. A few did predict these events, and perhaps each benefited from a stroke of luck. Many investors reacted by selling already depressed securities in the aftermath, and more than a few of these victimized portfolios have yet to recover.

The investor who predicts an impactful market, industry, or company event becomes intoxicated by the lucky call and begins to base an investing philosophy on the sudden perceived ability to foresee future events. Such inebriation of financial intellect induces the proverbial gazing into the crystal ball, encompassing a false state of being. With poetic justice, the luck soon runs out, as does the principal on the investments.

Unless one has the magical instincts of Warren Buffett.

Fear and Greed as Pricing Mechanisms

This chapter supports a value investment theory of becoming greedy from the fear by buying when a surprise macro event affects an entire economy or sector and being fearful of the greed by selling on the surprise micro event limited to a company or industry. Widely credited to Buffett, the metaphor of buying fear and selling greed produced the most famous value investor of our time.

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Disclosure: The author’s family portfolio held a long position in AAPL at the time of this writing.

Copyright 2019 by David J. Waldron. All rights reserved ...

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William K. 1 month ago Member's comment

Certainly the author's premise is correct. Buying and selling based on emotions is very seldom the best method of actually turning a profit. The exception would be for the gamblers who do it for the emotional thrill, with winning being a secondary benefit. That does explain the stampede actions that sometimes are seen. The sole benefit of always running with the herd is always being in the herd. Not my goal at all.

Edward Simon 1 month ago Member's comment

Enjoyed the excerpt. Look forward to checking out the online version.