“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”
A quote by Warren Buffet. But I am often asked what he really means by that. And obviously if you know anything about Warren Buffet he is referring to the stock market and buying stocks.
Typically when fear strikes the market prices drop, and when everyone is confident or “greedy” the market rises. The cause of this is supply and demand. When people sell, supply goes up and demand along with price goes down. And when people buy, supply goes down and demand, again with price goes up. So it seems that demand goes along with price. When people are fearful they sometimes sell just because everyone else is selling, they have no real logic they just get scared of losing their money so they sell. (Some sell to make a profit but that’s a different story)
Sometimes they will sell stock in a company like Chipotle because there is speculation of Greece defaulting on their bonds. So they sell a perfectly good company which really has no ties to Greece or the European Union. All because of speculation? Makes no sense, but it does if your fearful of any bad news. So they sell the stock drops for no reason what so ever. This is when you become greedy, you buy the companies like Chipotle when the price fluctuation has nothing to do with the company. They were fearful and sold, nothing changed with the company there are still people buying their product they have no issues buying product to produce their. So you buy, because once they realize that it had nothing to do the company they buy back in, the price goe up and you instantly make a profit. Think of it as if the stock were to go on sale and you happened to catch the sale.
The same happens with the buying, companies like Chipotle are rapidly growing and people are buying the stock its climbing, theres nothing this company can do wrong, supply is good. But when the masses grow overconfident then it becomes time to start rethinking your buy position. Why? just when everyone thinks the company can do no wrong the stock is just going up and up, then Boom they have an e coli breakout in a string of their restaurants. Then all of a sudden their supply becomes questionable customers drop like flies and revenue tanks. People are frantic so they sell. But because you saw the overconfidence in the buying of the stock you already sold. People were too greedy, thats when you should be fearful. And when they are still too fearful to get back in because in their mind the stock is still questionable, you start buying in again.
For this very reason is why it is recommended that people buy and hold. Why? Because of the example above, people let fear and over confidence get the best of them. They get fearful and sell and don’t want to get back in until the stock starts moving back up. By that time the move is almost over but they buy back, then the stock drops and they sell again on fear. It’s a vicious cycle that takes a lot of people out of the game. Don’t be one of those people, if your in a good company that you know you want to be in for a long time and the price drops you should grow your position because if that company is going to be around and your in for the long term chances are it will go back up. That’s why there is the buy and hold method out there. And it’s not because there are funds wanting to just get your money, it’s because without the proper knowledge they know traders and investors a like will eventually take themselves out because they let the emotion take over. It’s a service they provide to help keep you in the game.
This is my overall take on it: “If their buying, sell it to them; If their selling, buy it from them.” -Russell Comer
If you would like to get my free guide about 5 things you can do to keep from losing money in the stock market.