In 2012, CNN introduced the Fear and Greed Index. It mixes together a number of hard data points (stock momentum, options activity, etc) and spits out a number from 0 (Extreme Fear) to 100 (Extreme Greed).
Last Friday, the index rang in at a four. That's awfully close to the most extreme figure it ever registered -- a two on March 12, 2020, just as the world was beginning to wake up to the threat of COVID-19.
As every finance site will tell you, Warren Buffett's most famous quote is: "Be fearful when others are greedy, and greedy when others are fearful."
By that logic, everyone should be piling into the market right now.
But that's not exactly what we'd encourage.
First, it's important to back up and offer the full quote from Buffett's 1986 letter to shareholders:
"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...[T]he 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. [emphasis added]"
Yes, it's generally good to be greedy when others are fearful. But it's equally important to understand that it might take weeks, months, or even years for these moves to ultimately work out.
That's why an eyes-wide-open approach matters right now.
Our suggestion:
- Review the companies you're interested in, and evaluate how strong the business (not the stock) is performing.
- Take those same businesses and evaluate the valuation of their stocks.
- Make a list of the most appealing opportunities from the previous steps.
- Give yourself a day or two to sleep on this list.
- Act.
This isn't a guarantee for instant success. But we've been through times like this before. And putting in a process like this will both (1) lower the likelihood of huge, emotion-driven mistakes and (2) make wise, long-term investments you'll be thankful for decades from now.
In the end, that's the recipe for surviving volatile times like this.
Wishing you continued investing success,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long Term Mindset
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