Investing over a long period requires several factors to be successful. Choosing the right stocks is first. Position sizing and risk management are also key. Opportunity is also another. Rarely does the market drop in price as much as it has done this year. But when will the bottom be in? We think that the simple investing style of “Buy Fear, Sell Greed” is in play now.
Buying when investors are fearful
While you have probably heard this phrase before, it has the power to drive an important point home: If you buy stocks when investors are most worried, during situations when shareholders are dumping stock primarily because they are driven by fear—you can position yourself uniquely to pick up those same shares for a substantially undervalued price.
Fear will fade
Eventually, fear will fade. Companies will regain the trust of investors and money will be put back into the market. Now is a good time to find companies that you like but are currently very undervalued. When fear stops being factored into that stock’s price, a more realistic valuation will occur as the price rises.
This typical rebound leads the second part of the phrase, which holds true on the flip side: Smart investors who have bought the fear might have to find the most opportune moment to sell the greed.
Greed is typically created by shares that have been increasing in price. The stocks that you bought after investors dumped them during a moment of panic will (almost) inevitably attract the hungry eyes of investors who are watching them rebound back to proper valuations, and possibly even beyond.
Don’t get greedy
The funny thing about greed is that it is bottomless. If the shares go up 100 percent, the shareholder gets excited and hopeful that he or she might reach a 150 percent gain. If the value of those shares increases to 150 percent of the price where he or she bought them, that same shareholder will then hold out for 200 percent. Typical investors aren’t looking for profit-taking opportunities, they are hopeful for even greater gains.
If you are using this time to buy the fear, be smart about your greed. Use the rebound to sell the extra shares you have bought and then use that extra cash for new positions. Or, if you are looking to hold these companies over very long period of times, these fearful buys will help you have a much lower average over the long term.
Please read our full disclaimers regarding the information published. The above is intended for informative purposes only and should not be taken as investment advice. Trading on leverage can result in losses larger than your initial deposit.