Common stocks, of course, are the most fun. When conditions are right that is, when companies with good economics and good management sell well below intrinsic business value – stocks sometimes provide grand-slam home runs.
But we currently find no equities that come close to meeting our tests. This statement in no way translates into a stock market prediction: we have no idea and never have had whether the market is going to go up, down, or sideways in the near or intermediate future.
What we do know, however, is that occasional outbreaks of those two super contagious diseases, fear and greed, will forever occur in the investment community.
The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree.
Therefore, we never try to anticipate the arrival or departure of either disease.
Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
Fear is the foe of the faddist, but the friend of the fundamentalist.
Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as a consequence of the ingrained tendency of most people to speculate or gamble, to give way to hope, fear and greed.
Try not to let your emotions affect your judgement. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks.
When there’s only greed and no fear, everyone wants to buy, no one wants to sell, and few people can think of reasons why prices shouldn’t rise.
It’s from the extremes of the cycle of fear and greed that arise the greatest investment profits.
Asset prices fluctuate much more than fundamentals.
This happens because, rather than applying moderation and balancing greed against fear, euphoria against depression, and risk tolerance against risk aversion, investors tend to oscillate wildly between the extremes.
They apply optimism when things are going well in the world (elevating prices beyond reason) and pessimism when things are going poorly (depressing prices unreasonably).
Be fearful when others are greedy, be greedy when others are fearful.