Fear vs. Greed

It was old time Wall Street mogul Bernard Baruch who said, when asked how to make money on Wall Street, "Buy straw hats in January."

Five or six years ago, in 2002 or early 2003, a local financial planner who hosts a call in radio show was getting a lot of fearful calls from investors, and basically said to his audience, "You only get 2-3 opportunities PER DECADE to buy stocks at bargain prices like this." Which of course proved to be right. In 2003, the market bottomed in March and launched an impressive advance which topped out just a few months ago, so almost any buying you did at that point probably proved quite profitable.

So what I'm really saying here is "buy low, sell high." Wow. Really profound stuff, huh?

But if you have ANY experience in investing, you know that in practice, it is much harder than that. It has been said that there are only two emotions that rule Wall Street, FEAR and GREED, and the two sides of our brain are in a constant battle between the two. So in order to really "buy low," you generally have to screw up all the courage you can muster, at a time when everyone is convinced that the world is about to end. In other words, you have to overcome your fears and buy "when the blood is running in the streets," as Wall Street Baron Nathan Rothschild put it.

The same phenomenon, of course, works in reverse, and it's just as hard emotionally to "sell high" and take money off the table when EVERYONE is making tons of money. The period between 1998 and 2000 was like that. And the seductive thing about market bubbles like that is that you tend to make the MOST money right near the end. As you Wall Street expert put it, "You have to learn to let the other guy make the last 10%."

I have had clients tell me that they'd like to sell a stock if it moves, say, five points higher. But then, when it gets there, they change there minds, telling me they'll wait for a while because "the stock's been acting really well lately." At which point I say, or at least think, "How did you expect it to move up those last five points WITHOUT acting well?" This phenomenon has given rise to a joke among traders about a type of order that doesn't really exist, "cancel if close."

Obviously, the reason I am bringing this up today is that the world markets had a significant meltdown over the weekend, and our markets were projected to open down over 500 points, at least before the Federal Reserve stepped in and lowered short term interest rates by 3/4%.

So cooler heads will probably prevail, at least for those of you who don't get your financial news from the major media. For they are always telling us what we should be afraid of next. But there is a simple solution for that... Click.

There, isn't that better? :-) Bob

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