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Dr. Paul Price
Dr. Paul Price
Articles  | Author's Website |

Was Gordon Gekko Right?

October 03, 2014 | About:

Greed May Be Good, But Fear is Golden

Gordon Gekko, Oliver Stone’s fictional character from the film Wall Street, made the phrase “Greed is Good” universally accepted among investors. When it comes to actual market timing, though, most traders would be better off feasting on "Fear."

After a series of large point drops in the DJIA, S&P 500 and Nasdaq indices, CNN reported this week that their 'Fear & Greed Index' was registering its highest anxiety reading in a very long time. One month ago, with the indices near all-time peaks, investor sentiment was dead neutral. One year earlier, the mood was quite downbeat ahead of what turned out to be a decent 12-month advance.

The CBOE showed a similar 'panic mode' indicator as judged by their put option to call option ratio. That indicator signaled the most put buying by the public in well over a year. Mom and Pop typically only pony up for put protection after large market declines.

Another sign of intense fear came from the "Net New Yearly High v. New 52-week Low" ratio. Subtracting the number of new lows from the new highs almost never yields a negative number. That dubious distinction was reached during this week’s sell-off.

Casual observers might not realize that those negative vibes typically accompany great buying opportunities. Don’t take my word for that. Judge for yourself.

I’ve reproduced CNN’s Fear & Greed chart going back three full years, to the fall of 2011. Then I added the same time period for the S&P 500 ETF (SPY). Not one of the eleven most high-anxiety periods should have been sold.

100% of those nerve-wrecking moments reversed within weeks, leaving many investors stopped out of great positions simply due to temporarily lower share prices.

Can you imagine rushing to sell virtually anything else because buyers kept making you worse and worse offers? Rational people would ignore bad bids while waiting for a discerning bidder willing to pay at least fair value for their merchandise.

Smart shoppers with cash to invest treat market overreactions as gifts. Extreme sell-offs provide chances to get in cheaply. Over-enthusiastic periods allow for cashing out of holdings, often at more than justifiable quotations.

Stop worrying about short-term declines on your monthly statements. Start shifting some of your ZIRP-devalued cash reserves into stocks while others are still fretting.

Greed may be good, but bargains are hard to find when euphoria reigns.

When investing your money, it is completely normal to feel the same scary emotions as everybody else. It is not okay, though, to behave like they do.

Note: I put this article together on Thursday evening, Oct. 2, 2014. As of 2:25 PM on Friday, Oct. 3, 2014, stocks were rebounding nicely – up 216 points on the DJIA.

About the author:

Dr. Paul Price


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Rating: 4.5/5 (12 votes)



Grox01 - 5 years ago    Report SPAM

Great thougths, as always :)

Hpeterscheck premium member - 5 years ago
Very solid. And I'm with the feeling fear crowd... Thus I added some to my position in Exxon Mobile, XCO (really scary), and Chicago Bridge and Iron when they all dropped in some cases quite a bit. Now those might be the wrong businesses to own but that's not the point of this :).

It's really hard as you point out.

A big deal here is the empathy gap. Many people think they will 've able to buy when others are scared but they don't realize they will also be scared. It's about managing your fear with rationality and a good weapon against fear is having a good understanding of what the company you invest in does. But man I have to say... I STILL find it really hard not to sell low. Avoiding buying high I find easier but when you see your holding plummet 10%-20% it's a real test every time.
Traderatwork - 5 years ago    Report SPAM


Traderatwork - 5 years ago    Report SPAM

Thanks, Paul, That is an awesome chart you produce there, it proves once again Benjamin Graham's golden principle that, "You are neither right or wrong if the crowd agree or disagree with you......" Or the crazy Mr. Market, or "a stock is partial ownership of the company".... Or steal one line from Mr Munger, if you do not understand some of the important principles (of life), you will be going through life like a one legged man in a ass-kicking contest. Don't we all wish we can understand all these when we are 20 years old...

AlbertaSunwapta - 5 years ago    Report SPAM

I don't think the latent fear argument works so much any more. In my view much of the fear among those that really move the markets has long since turned to greed. We're many years past the 2008/09 stock market dip and the fears it raised, and a lot of people, especially the big and institutional players have fully participated in the recovery (which in terms of the real economy continues).

So, personally I have no fear of the future but look forward to another significant stock market dip in order to redeploy savings that I have put into cash - joining I suppose those that never left cash after the crash. In the past two years I've been withdrawing investments from the equity market since I was greedy when others were fearful in 2008/09. At some point in a market boom, we can no longer claim everyone is still fearful.

In otherwords, I have the most fun shopping for products during off-season sales rather than at peak fad.

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