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Warren Buffett said “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” Lately I have had several discussions with people who have mentioned how scary it is to invest in the stock market. I am always curious whether they think it is scarier now than 18 months ago. While the moves we have seen over the past year have certainly been enough to make anyone experience fear removing one’s emotions from the investing equation is always a good discipline. It allows you to make decisions based on historical data and reality instead of fear or greed.
Greed is what makes us invest more in the markets after huge upward moves accompanied by fear that we are going to “miss out”. Fear is what makes us avoid investing near the bottom while greed makes us want to hold on to everything we have. While it is not my intention to predict market tops and bottoms for I would be in the Forbes 400 if I could do so I do try to make reasonable decisions based on probabilities. For example to me it seems more probable that the market is going to go upward over the next few years since it has had the largest correction since the 1930’s and gone down around 40% than significantly down more. It may languish around near where it is now retest the previous lows or maybe even go a little lower but it seems probable that it will go up from this vicinity eventually. Look at the chart below and ask yourself whether you think the market looks scarier now than it was 18 months ago.
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