How to Be Fearful When Others Are Greedy: 5 Lessons from Warren Buffett

By Chika

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Last Updated: January 22, 2022

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The Fed's expected interest rate hike has spurred a cycle of sell-offs in the market.

Stocks that were high performers in the last two years have lost favor with investors who are rotating into safer sectors and assets to protect their investments from declining in value. Others are taking a complete flight from the market.

There is a lot of fear and frothiness in the market as everyone appears to be unsure where to put their money to work. 

However, it is in such moments that legendary investor Warren Buffett advises investors to be greedy.

In his words, "Be fearful when others are greedy".

How does one execute this contrarian strategy amidst growing noise and panic in the market?

 

5 Ways You Can Be Greedy While Others Are Fearful & How to Invest Profitably

1. Stay away from unprofitable companies

During periods of market sell-offs, stocks that get hit the hardest are unprofitable companies whose valuations are based on future earnings.

This explains why tech stocks more specifically (Cathie Wood-type stocks) are getting pummeled in the market.

Your best bet is investing in profitable companies with strong fundamentals. Also, such companies usually pay dividends to investors, which can be a source of cash flow for them. The key thing is looking for companies with strong fundamentals and investing in them. 

The best time to buy any item is when everybody is selling. This is the time you get the best bargain. However, as human beings, we allow our emotions to take the driver's seat and cloud our judgment. This is why most people sell when others are selling, and buy when others are buying.

The most profitable investors know that the reverse is the case.

One good thing with buying stocks during a sell-off is that before the market comes around pushing the stock into positive territory, you would have made gains from appreciation. For example, you buy a stock that has lost 40% YTD,  if the stock rises 20%, your investment has appreciated though the stock is still negative for the year. 

 

2. Avoid speculation

This is a follow-up to the last point.

Speculating entails betting on future returns, even though the present evidence suggests otherwise. It is an investing strategy based on promise and hope and not fundamentals.

Though speculation may work in a bull market when there is surplus cash and everyone has a huge risk appetite, it is a futile move in a bear market or market sell-off when investors would be seeking safer assets.

As such, though the majority of investors may be fearful, do not allow your 'greed' to push you into speculating. This is a recipe for loss during a sell-off.

 

3. Average your way down

There is no better strategy to use in a market sell-off than dollar-cost averaging.

Since no one can accurately pinpoint a market top or bottom, your best bet is buying a selected stock in installments during price drops. This not only minimizes risks but also reduces the average cost of your investment.

For example, if you have $1000 to invest in a stock, you can divide it into 2 or 5 installments and buy anytime the stock price slides. 

 

4. Look through the noise

Understand that the market comes in cycles.

Every bullish run would climax to a bearish drop. While cycles are sacrosanct in the market, it is up to the investor to know how to position themselves appropriately. Since investing entails sacrificing present capital for future gains, you always have to keep your perspective on the future and not what is happening presently.

As such, the best time to prepare for a bull market is during a bear market. This is the time to load up on shares of stocks that have been on your radar and sit tight until the ship sets sail. 

 

5. Control your emotions

The only way to be greedy when others are fearful is by controlling your emotions.

It takes a lot of willpower to have a contrarian standpoint from the prevailing one. Worse, fear is a much stronger emotion than greed, so it is easy to capitulate and give in when everyone around you is selling.

This is why it is advocated that your investment thesis should be backed by fundamentals, so that in moments of doubt you can refer to your analysis to keep you on track. 

 

Key takeaway

Baron Rothschild is credited with the phrase, "Buy when there's blood in the streets, even if the blood is your own." 

However, maintaining a contrarian standpoint is not easy when everyone is headed in the same direction as a herd.

However, it is during such periods that the best opportunities in the market are brought to the fore. As such, rather than head for the exit door like everyone else, it is time to turn on your searchlight and look for the best bargain the market has to offer. 

Photo by MayoFi from Pexels

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