In the world of investing, two primal emotions often govern the decisions of even the most rational minds: fear and greed. These powerful emotions can sway investors into making impulsive choices, sometimes driven by market volatility and, at other times, opportunities.
Greed is characterised by an insatiable desire for growth, and can entice investors to chase after high returns without a clear understanding of the associated risks. This emotion often gains prominence during bull markets, when stock prices are on an upward trajectory, and stories of overnight riches become commonplace chatter. Greed can prompt investors to pour money into trendy sectors, overvalued stocks, or speculative assets, as they hope to catch the wave before it crests. However, as history has shown, what goes up must come down, and those who invest blindly in the throes of greed often suffer significant losses when the bubble bursts.
Conversely, fear is driven by the instinct to avoid loss. In the financial world, this can manifest in the form of panic selling, staying out of the market entirely, or hoarding cash. During bear markets or times of geopolitical or economic uncertainty, fear can grip the hearts of investors, causing stock prices to plummet even further. A fear-driven market can lead to undervaluation of solid companies with sound fundamentals simply because the broader sentiment is one of pessimism. Ironically, such fearful environments often present the best buying opportunities for discerning investors.
The interplay between fear and greed creates a feedback loop in the market in that when greed prevails, prices rise, fueling more greed. But once the tide turns, fear sets in, leading to a sell off and potentially more fear. Wise investors strive to recognize these emotions, both in themselves and in the market at large, and act contrary to them. As the adage goes, “Be fearful when others are greedy, and greedy when others are fearful.”
At InvestLife we are no strangers to fear and greed, and we often find ourselves reiterating to clients that short term market volatility should be taken with a pinch of salt. Don’t mistake this for ignorance, we never advise our clients to ignore or not take into account short term market effects. Instead we reinforce their focus on the long term goal orientation of investing.
The psychology behind investing is a concept that fascinates me. It is quite amazing to see how investors start to warp their often sensible logic, to making very irrational and knee-jerk decisions. Upon researching this concept I found that there is even a Fear and Greed Index that was created by CNN Business, that gauges market trends and has been used as a research tool and barometer for timing markets.
Understanding the correlation between fear and greed is essential for any investor, as emotion-driven decisions can cloud judgement and divert you away from your sound investment strategy. Those who can navigate these tumultuous waters, recognizing the signs of fear and greed and adjusting their sails accordingly, stand a better chance of achieving long-term success in the complex world of investing.
“If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”, Warren Buffet
Investing is about minimising risk to generate wealth over the long term, not generating short-term profits.
