3. Fear and Greed
Posted on January 22, 2019
A Letter to You from Grandma Sylvia
Today can be another great day for you. Believe it. Remember, every day is a new start.
The Big Picture
Let’s live our lives in joy and without undue fear. Eleanor Roosevelt, wife of President Franklin Delano Roosevelt, had many wise sayings. One was:
You gain strength, courage, and confidence by every experience in which you really stop to look fear in the face. You must do the thing which you think you cannot do
Whatever your day today, take time to sit back, relax, and try to wipe away any fears from your thinking. Now let’s look at investing.
When my husband was doing all the investing, there came a day when the market crashed. We lost money. At the time, any money we lost I thought was devastating. We didn’t have much and it took some sacrifices to be able to save to invest. I had no idea what a crash, or a downturn or a bear market, meant. Was it the end of the financial markets? Was the rest of our money going to get lost also? I panicked and pressed my husband to get out of the market. I don’t know why he did, but he did. In a while the market regained the losses, but we were out so we didn’t get back what we lost.
That story of acting on fear has stayed with me.
Today’s Topic: Fear and Greed
In my life, I’ve read many times that fear and greed are emotions that rule investor’ behaviors in the stock market and that’s not good. I know from personal experience that there were times when I acted out of fear or greed…and I regretted it later.
When the market goes down, people often rush to sell what they have, even when the downturn is temporary (often bouncing back in a day or so). They sell stocks in companies that continue to be good, strong companies.
When the market goes up, people worry that they aren’t in the market and it may be too late!
There are so many reasons why the market goes up and down and many of them aren’t related to the companies I’ve bought stocks in. Sometimes large organizations, like pension funds, need to rebalance what they have and they sell. Sometimes other groups change direction on what they are holding. Sometimes people are taking their profits and looking at other opportunities. The list goes on.
By the way, a bear market is when the market goes down, a lot. The way I think of it is that when bears attack they lunge down with their front legs and paws and maul their victims on the ground. I’ve read that other people say the bear puts its head down when it is charging. In contrast, a bull market is when the market goes up, a lot. Bulls charges by taking their horns and throwing their victim up into the air, as we might see when a bull charges and throws a matador in a bullfight. A bull raises its head when its charging.
The graphic below pictures a bear with its head down and ready to pounce. The bull is about to raise its head and charge up.
Greed is another emotion that hits many of us. When a friend was telling me how much money he made over the years in a pharmaceutical stock, I finally decided to buy. Now I’m holding for a while because I’m losing a little. He made money when the stock was cheap; now it’s not.
What all of us can do is to save regularly and invest regularly in non-emotional ways, like buying baskets of stocks or bonds rather than a single thing. Some of the best of these baskets are called index funds and I’ll talk more about them in another letter to you.
Hope you are saving and when we talk more about index funds you can see if they are right for you. OK?
Right now, we’re just going slowly to learn some of the basic ideas of investing.
Important Ideas 1 and 2
• Don’t buy or sell anything in the market based on fear or greed.
• Keep saving so you can invest wisely.
Today I’m recovering from some minor surgery and I feel blessed that we have great doctors, nurses, other staff and hospitals caring for us. I’m going to do my part by moving and keeping myself as active as possible. I’ll play some good music and enjoy getting up and about. How about you?