Warren Buffett Explains Why Fear Overshadows Greed

By: Alex Crippen

Getty Images Warren Buffett

It's a good time to remember one of Warren Buffett's classic rules:  "Be fearful when others are greedy, and be greedy when others are fearful."

With so much fear in the financial markets right now, it's not a surprise that Buffett is being greedy.

He reminds Fortune's Andy Serwer that "the lower things go, the more I buy.  We are in the business of buying."  (He, of course, won't say exactly what he's buying.)

Buffett often makes a comparison to the price of hamburgers at McDonalds.  If the price tag is reduced he doesn't get worried, he buys more and feels good that he's paying less for the same hamburger than it would have cost him the day before.

He acknowledges, however, that overcoming fear is easier said than done.  "There is no comparison between fear and greed.  Fear is instant, pervasive and intense.  Greed is slower.  Fear hits."

http://www.cnbc.com/id/44108052

Buying Time

When the market hits its low, true value investors feel that harvest time has arrived.

"The most beneficial time to be a value investor is when the market is falling," says institutional manager Seth Klarman.  There are plenty of companies ripe for the picking.

In the summer of 1973, when the stock market had plunged 20 percent in value in less than 2 months, Warren Buffett told a friend, "You know, some days I get up and I want to tap dance."

Unfortunately, this is the time when investors are feeling most beat up by the markets.  Fear and negative thinking prevail, and anyone who has faced down a bear knows how paralyzing fear can be.  This, at the depths of a bear market, is the time to buy as many stocks as are affordable.

Value bargains aren't found in strong market.  A good rule is to examine stock markets that have reacted adversely for a year or so.

Undervalued stocks quite often lie dormant for months - many months - on end.  The only way to anticipate and catch the surge is to identify the undervalued situation, then take a position, and wait.

Benjamin Graham: "Buying a neglected and therefore undervalued issue for profit generally proves a protracted and patience-trying experience."

How do investors "chase the market"? It this a bad thing?

	How do investors "chase the market"? It this a bad thing?
Generally, an investor "chases the market" when he or she enters into a highly priced position after the stock price has increased rapidly or become overpriced. An investor who exits a position after the security has lost considerable value also is said to be chasing the market. Both positions suggest that the investor chased the market by following trends unwisely. Many investors unknowingly chase the market and endure large losses as a result. During the dotcom bubble, for example, many investors sought to profit from buying shares of internet and technology companies that were doing well. The popularity of dotcom companies eventually dropped and the investors who had chased the market were left with big losses. Investors who chase the market typically make investment choices based on emotion rather than careful consideration of market trends using statistics and financial data. For this reason, this strategy has been widely criticized and most financial advisors warn against it For more on this topic, read When Fear and Greed Take Over and The Madness of Crowds. This question was answered by Bob Schneider.

Read more: http://www.investopedia.com/ask/answers/09/chase-the-market.asp?partner=basics122311#ixzz1hPJzapcB

The psychology of investment: caution or risk?

What makes some investors revel in danger and others flee at the first sign of market volatility?

The psychology of investment: caution or risk? Photo: GETTY IMAGES

By Emma Wall

7:56AM BST 19 Aug 2011

7 Comments

Evolution has programmed us to flee from danger. But the same instinct that protected early human from the sabre-toothed tiger makes for an unsuccessful investor. As global markets have fluctuated wildly, investors have been indiscriminately cashing in their investments, panic selling as times get tough.

A tenth of the fund supermarket Fidelity FundsNetwork's customers have switched their investments into less risky assets as a result of the eurozone worries, with low-risk bond funds the preferred option over equity or equity-income funds.

But if those investors kept their composure and did nothing, they would have made money as banking stocks pushed the FTSE 100 up to close last Friday on 5,320, compared to 5,247 the previous week.

But what makes some people flee to cash deposits as markets crash and others gleefully seek out opportunities among the ruin? While many of us would prefer to consider ourselves spontaneous risk-takers, when it comes to the crunch, most investors value capital preservation over high-risk, high-income investments.

"Everyone wants minimum risk and maximum return, but it is rarely possible to do both," said Neil Pedley of Vestra Wealth.

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Wealth managers have the complicated task of gauging a client's risk appetite to allocate their cash correctly. Rather than take the client's word for it, wealth managers at Barclays Wealth employ personality profiling to gauge investment attitudes.

"It can be difficult for investors to be honest with themselves," said Greg Davies, who is head of behavioural finance at Barclays Wealth. "Some people like to think of themselves as composed risk-takers, but if you try to invest in a way that does not respect your natural 'type', you make decisions you are not comfortable with and you will lose money."

There are two parts of our brain that govern decision making.
1.  The first is rational, logical and more suited to decision making based on long-term goals. 
2.  The second controls emotional decision making – the fight-or-flight reflex.

In times of stress or perceived danger, humans default to the emotional brain and seek instant gratification, rather than considering long-term success. Though this "action bias" may have been a successful tactic when early human was faced with a predator, it does not help investors make money.

"When we pull our money out of markets during a crash, we get instant emotional gratification. We are happy because we have removed ourselves from the perceived danger – the risk of losing more money. However, this short-term thinking is bad for long-term goals," said Mr Davies.

As well as asking clients about their investment goals, Barclays constructs client portfolios based on the results from the personality profiling, which assesses composure in the face of risk.

The idea is that two clients could have the same amount of money to invest and the same long-term investment goals, but if one has a high level of composure and the other a low level of composure, their investments should be different. The client with the low composure is more likely to act rashly when he sees his investments fluctuate in value, so his portfolio is hedged with slower growth but low-volatility assets.

By constructing a portfolio in this way, Barclays lessens the chances of clients falling for pack mentality – buying at the highest price and selling at the lowest.

Wealth manager HFM Columbus also uses psychometric profiling to help determine clients' attitudes to investment risk, as well as the ways to best service clients, for example, are they likely to read fund literature, or would they prefer a short summary?

The test assesses five major personality traits: openness, conscientiousness, extroversion, agreeableness and emotional stability. "We are focusing principally on the 'conscientiousness' variant to ascertain how much or how little the client wishes to engage in the advice process and to ensure that we deliver the correct amount and type of information in order for them to make a decision," said director Marcus Carlton.

"We anticipate that the client's degree of conscientiousness will inform us if they are rash decision makers or if they make more studied decisions, and the profiler will also look at emotional stability in order to analyse likely reaction to unexpected outcomes – for example severe market volatility – so that we can protect clients and manage their expectations better."

You do not need a psychometric test to take advantage of this psychology. Mr Davies said investors should exercise self-knowledge and put in place a set of rules for investing.

"Most of us can help break our emotional investing habits by setting a framework in place in times of calm to be prepared for times of turbulence. You can bet those investors who are taking advantage of value stocks now will have planned their response to these situations. They will be informed and have engaged with markets for a while," said Mr Davies.

http://www.telegraph.co.uk/finance/personalfinance/investing/8710503/The-psychology-of-investment-caution-or-risk.html

How to overcome your financial fears in investing?

These are the usual three basic fears one has to face in investing, namely:

Fear of loss
Fear of failure
Fear of unknown

Here are some suggested ways to overcome these:

Fear of loss:  Understand the probabilities and consequences of any potential loss(es) in your investing.  Always remember, in the face of uncertainties, your investing actions should be based on the consequences rather than the probabilities of these loss(es) occurring.

Fear of failure:  Nothing venture, nothing gain.  Without trying, you have already failed.  Seize the opportunity.  Be prepared for possible failures too, but take these as valuable lessons preparing you for a better future.

Fear of the unknown:  Research the topic well to become knowledgeable.


Also read:
I Will Tell You How to Become Rich: "Be fearful when others are greedy, and greedy when others are fearful."
http://myinvestingnotes.blogspot.com/2010/12/i-will-tell-you-how-to-become-rich-be.html

How I Deal With My Financial Fears

How I Deal With My Financial Fears
August 14, 2008 @ 8:00 am - Written by Trent

Even though I write a lot about personal finance on here and elsewhere, I still have a lot of my own hang-ups about personal finance. One of the big reasons I started The Simple Dollar was to learn how to deal with those fears, and once I dealt with that new batch, a fresh batch came along. Right now, my biggest fears revolve around taxes, the possibility of a third child, identity theft, and future career directions.

I think this is actually a pretty normal thing for most people. We all have areas where we’re less than confident and we all have areas that concern us about the future.

It’s very easy to push these fears aside and just not worry about them, especially if they’re not vital to our day to day life. We’ll tell ourselves, “I’ll think about that later,” and then when it comes up again, tell ourselves the same thing again, until it’s sat around for years, untouched.

This can really be dangerous. Take, for example, my fear of taxes. I’m making myself face this fear this year and that means I’m digging into an uncomfortable subject, saving for the taxes, and paying them when they’re due. If I had taken the “typical” route and worried about it later, I would be suffering dearly when tax time came around.

What can a person do to step up to the plate and tackle our financial fears? The obvious “just do it!” tactic is nice, but it doesn’t really work here - if it were that simple, we’d already have faced the fear and moved on with life, wouldn’t we? Here are six alternate tactics to try.

Make a list of what exactly makes you nervous
Quite often, a fear of a financial move is actually just related to some small aspect of the move. Spend a bit of time figuring out exactly what it is that makes you afraid. I find that doing this with a pen in hand and a piece of paper in front of me makes it easy for me to jot down thoughts, which I can start working through.

Sometimes what you’ll find out is that you’re actually stressed out about something else entirely or you’re only stressed out by a very small part of the equation. For example, I know one person who was avoiding dealing with his retirement situation because he intensely disliked the retirement specialist at his workplace. It wasn’t a fear of retirement, it was a fear of interaction with someone.

Do some research
One big fear is fear of the unknown. Quite often, a lack of knowledge will make someone afraid of something else - we can all think of examples of this in life, where ignorance makes people afraid.

Don’t succumb to it. If you’re afraid of something because you don’t know about it, investigate it. Hit the library or visit Wikipedia and find out more. Dig in, a piece at a time, until you understand the topic - and the fear of it is lifted.

Talk to someone about it
If something makes you uncomfortable, put forth the effort to talk to others about it. Find someone you trust deeply, preferably someone with some experience in the area in question, and just ask questions.

This might mean contacting a financial advisor. If it does, seek out a fee-only financial advisor, as they won’t be engaged in selling you products and are most interested in just providing information to you. If a fee-only advisor isn’t available to you, you can use another, but be very hesitant to invest or put money in specific places based on their advice - instead, just take their information with you and follow up yourself with your own research.

Write out the pros and cons of your decision
One alternative to having a conversation, especially if the fear is related to an important decision, is to simply write out all of the pros and cons related to that decision.

For example, I kept putting off my decision to switch to a full time writing career. One of the big steps that helped push me towards writing was simply making a giant list of the pros and a list of the cons of making the leap. This really helped put things in perspective, as it became clear I was letting the “cons” guide my way of thinking, even though the “pros” were a much more powerful list.

Spend some time each day thinking about the fear
Don’t let yourself lay the fear on the table, because once you start ignoring it, it’s easy to just let something very important slide by until it’s too late. Instead, add consideration of the fear to your daily to-do list and actually spend a bit of time thinking about the fear seriously.

This is often good to do if you’ve gathered the information but are still hesitant about what to do. Steady and informed consideration of a fear is a great way to make that fear go away. I like to think of my two year old son who fears sharks in his room. After giving him a flashlight to investigate the room and some talk about how sharks need water to swim in and there’s no water in his room, he thinks about this information, overcomes the fear a little, and goes to sleep. Over time, his fear of sharks has become less and less intense.

Take a baby step
Once you’ve made up your mind that you’re going to do this, get started with a first little baby step. Take a little action that moves you in the right direction, and feel the relief that comes with wiping away your fear.

Then, take another little step, and another. Soon, you’ll be well on your way to completely eliminating the challenge that brought you so much fear to begin with. And it will feel really good.

What are your financial fears? Feel free to share them in the comments, and good luck on trying to conquer them.

http://www.thesimpledollar.com/2008/08/14/how-i-deal-with-my-financial-fears/