Will It Be Different This Time? Part III: Acting from Foundation Instead of FOMO
Investors plagued by fear or greed can continue to accumulate by sticking to the fundamentals.
We have already demonstrated that investors are susceptible to various biases—namely, overconfidence bias, herd mentality, and FOMO. At the root of these biases are human emotions,which often lead to irrational investment decisions. In Part 3, we will focus on the emotions of fear and greed, which are even more fundamental than the aforementioned biases with respect to making basic investment decisions. According to Kirk Chisholm of Innovative Advisory Group, the stock and bond markets are primarily driven by fear and greed, which are strong primal emotions, not something we can overcome easily.
Legendary investor Warren Buffett’s statement about fear and greed crystallizes the dynamic that permeates every aspect of investing: “Be fearful when others are greedy and greedy when others are fearful.” Buffet’s extraordinary success as an investor is tied to his ability to separate his emotions from any prevailing market condition. In fact, he’s used herd mentality to his advantage.
This is in contrast to the typical retail investor who is victimized by their own emotions, doing the exact opposite of what Buffet preaches: selling low and buying high, or buying and selling into extreme greed and fear cycles, respectively.
Looking back on the 2008-2009 market meltdown, the Dow Jones Index lost half its value in less than a year, and millions of investors saw billions of dollars in assets disappear. Many investors pulled money out at or near the bottom. Five years from that 2009 market bottom, the Dow was up roughly 10,000 points to a record 16,000. Patient investors were the winners. James Glassman of Kiplinger once said that “making money in the stock market is hard not because finding great companies is difficult but because the best and easiest-to-understand strategy for winning is so difficult to adhere to. That strategy can be described in three words: buy and hold.”
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