Be Greedy When Others are Fearful

In the book, “The Real Warren Buffett,” Mr. Buffett is quoted as saying, you “should try to be fearful when others are greedy, and greedy when others are fearful.”

In reality, that can be very difficult to put into practice.

586-112013-090610-dollars-02-web.jpgMost every news report we’ve come across this week attributes much of the stock market sell-off to fear.

•   Fear that “this time is different”

•   Fear that a “double-dip” recession is coming

•   Fear that a repeat of 2008 is happening
A fellow planner shared the following story to illustrate a common investor dilemma:

Assume that you live on Long Island and need to go to Los Angeles.  You plan to go by car.  You make it to Manhattan fine, but hit gridlock (despite it being mid-day on a weekday) on your way to the Lincoln Tunnel.  It is so bad that folks on bicycles are making progress as you are stopped.

You may be tempted to trade your car for a bike.  You likely would make it to New Jersey sooner than if you stick with your initial plan. But then what would you do?

If you had known about the gridlock ahead of time, you would have made different plans.  But you didn’t know, and now you are in gridlock, considering your options.

Once in the gridlock, making any progress (by bike) certainly feels better than the frustration you feel going nowhere in your car.  This better feeling, however, will just as certainly abandon you once you emerge from the tunnel, facing the remaining 2400 miles of your journey.

By the way, if it was clear to everyone that gridlock was going to happen at that time and place, that knowledge itself would likely have prevented the gridlock, for most people would have taken steps to avoid it.

If you can keep your head while others around you lose theirs, and if you can see past the short-term pain of the market, you’re likely to emerge from today’s crisis successful. If not, history suggests you’ll sell at the wrong point, and be no better off than a cyclist stuck in New Jersey.