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Fear and Greed

There is an old saying on Wall Street that the market is driven by just two emotions: fear and greed. Although this is an over simplification it can often be true. Succumbing to these emotions can have a profound and detrimental effect on investors' portfolios and the stock market. 

In the investing world one often hears about the differences between value investing and growth investing. Although understanding these two strategies is fundamental to building a personal investment strategy it is as important to understand the influence of fear and greed on the stock market. There are countless books and various courses devoted to this topic but tonight for our purposes we will demonstrate what happens when an investor gets overwhelmed by one or both of these emotions. 

Greed's Influence
So often investors get caught up in greed (excessive desire). After all most of us have a desire to acquire as much wealth as possible in the shortest amount of time and the emotion that lights this fire in us all is greed. 

The Internet boom of the late 1990s is a perfect example. Buying activity in any stock related to the Internet many just startups reached a fever pitch. It was a mania at the time with Investors getting greedy fueling further greed and leading to stocks being as grossly overpriced as anytime in history.  This created a bubble. It burst in mid2000 and kept leading indices depressed through 2001. 

Warren Buffet
We would be remiss if we discussed the topic of not getting caught up in the latest craze without mentioning a very successful investor who stuck to his strategy and profited greatly. Warren Buffet showed us just how important and beneficial it is to stick to a plan in times like the dotcom boom. Buffet was once heavily criticized for refusing to invest in highflying tech stocks. But once the tech bubble burst his critics were silenced. Buffet stuck with what he was comfortable with: his longterm plan. By avoiding the dominant market emotion of the time greed he was able to avoid the losses felt by those hit by the bust. 

We mention Buffet's style here only as an example of not getting caught up in greed.  However there is a difference between greed and momentum investing.  What we do at STHQ is invest in momentum and when the momentum subsides it is time to get out of those high flyers.  This is where most people fail.  They get in but only after most of the move have been made. Then they do not know how to get out safely without getting hurt. 

In Buffet's case he missed the move because he did not know how to get in.  He is not a momentum investor.  He is very successful at what he does so we cannot be critical of his style.  All we are saying is momentum can be played to the point of greed and then if you are on your game and get out before the momentum dies it can be a very profitable trading style.  In part two of this commentary we will discuss Fear.

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