Fear and Greed | Twin Turbos of the Markets
Fear and Greed | Twin Turbos of the Markets
Two primal, hardwired emotions that can help make us... or break us
Psychology
Deeply rooted in our evolutionary history, fear is fundamentally a response to perceived threat or danger. It can be triggered by the idea of financial loss, uncertainty, or negative economic news (I’m looking at you generic media outlet). On the other hand, greed is driven by the desire for reward. It can be triggered by the prospect of financial gain, positive market trends, or the fear of missing out on potential profits, and FOMO IS REAL BRUH.
Fear can make us overly cautious and focus on short-term risks over long-term potential, while greed can lead to overconfidence, where we start to overestimate our abilities or the quality of our information. See the potential problem?!
Good & Bad
Fear can be both good and bad for investors. It can help protect you against unnecessary risk, but if left unchecked, can lead to panic selling or avoiding investments altogether. Different people react in different ways.
Greed, too, has its pros and cons. It can spur investors to seize opportunities and achieve significant returns. But unchecked greed can lead to excessive risk-taking, creating bubbles and potentially leading to significant financial loss. I have felt this part too many times.
My deeper thought here is that greed is rooted in a lack of self worth and security. What I mean is that because I feel like I may not be or have enough, I have to try and risk it all to gain something to fill that void. Over my career I have drastically improved in this department. How about you?
Signs of Fear and Greed in Markets
In a fearful market, signs might include a general decline in stock prices, increase in volatility, and a move towards safe havens or cash. In a greedy market, you may see a significant and fast increase in stock prices, euphoria about investment prospects, and a disregard for risk. Hello GME, PEPE and NVDA!
Legendary Examples
One of the most notable examples of fear and greed driving market behavior is the 2008 financial crisis. Here, excessive greed led to reckless lending and risky investment behaviors, which eventually burst, leading to widespread fear and a significant market downturn.
Sir John Templeton provides another example. At the start of World War II, while many investors were scared and dumping their stocks, Templeton borrowed money to buy 100 shares each in 104 companies trading under $1 on the New York and American Stock Exchanges. He bought these regardless of the company's financial condition. This serves as a great example of ignoring fear, maintaining a contrarian approach, and benefiting from it. What a legend!
Long-Term Capital Management (LTCM) is an example of how greed and overconfidence can lead to downfall. The hedge fund was known for its high-risk arbitrage strategies. However, when Russia defaulted on its bonds, one of the many markets where LTCM had significant positions, it set off a massive chain reaction. The enormous amount of leverage they had taken on amplified their losses, and fear quickly set in among their lenders and investors. Whoops.
Choose your destiny
We can learn to harness fear and greed, rather than being controlled by them.
Recognize your emotions: Are you contemplating an investment because it's a good opportunity, or because you're afraid of missing out?
Stick to a plan: Having a well-thought-out investment strategy can help you navigate periods of fear and greed, especially during times you feel it. You can acknowledge the emotions, and then move forward with your plan. Meditation in real time! Namaste.
Understand market trends and dynamics that COULD happen, so you're not caught off guard when markets shift. Thinking of tail outcomes can help as to not put you in a complete daze. Think through all potential results and how you may act accordingly. And do it early.
Be patient with yourself. This is a hard journey. You WILL succumb to these emotions. It’s okay. Part of the game.
As always, you have one goal, keep your seat at the table… and you’ll be okay.