These six words have a lot of meaning for many investors, and they also describe an effortless and effective way to make money: “Buy the fear and sell the greed.”
- Fear and greed are two feelings that make price swings bigger.
- During a sell-off, investors who give in to fear and panic may be willing to sell a security for less than it’s worth.
- Investors who give in to greed may hold onto security even after it has become overpriced.
- Everyone feels greed and fear, but you can do better with your investments if you keep track of how much of each you feel.
- When investors are worried, you should buy.
What is the Concept of Buy the Fear and Sell the Greed?
Let us understand the concept first. If we can master this concept we can buy low and sell high. For this, we need to do exactly the opposite of what the other traders are doing.
Fear And Greed As Pricing Mechanisms
Even though you’ve probably heard this phrase before, it makes an important point: If you buy stocks when investors are most worried – when shareholders are selling stock mostly out of fear—you can be in a unique position to get those same shares for a much lower price than they are worth.
Fear Will Go Away
Like everything else, the fear in the market will go away over time. Companies will have faith again. In the middle term, maybe in the next few months. Shares that were dumped during a time of capitulation could start going up to prices that are more realistic and less fearful.
The Return and Selling the Greed
This typical rebound leads to the second part of the phrase, which is true on the other side: Smart investors who bought the fear might have to find the right time to sell the greed.
Shares whose prices have been going up tend to make people greedy. The stocks you bought after investors dumped them in a panic will (almost) always draw the attention of investors who want to see them go back up to where they should be, or even higher.
The Hope to Make Even More
The funny thing about greed is that it has no limits. If a person’s shares go up 100%, he or she is excited and hopeful that they might go up another 50%. If the value of those shares goes up to 150% of what he or she paid for them, that same shareholder will hold out for 200%. Most investors don’t look for ways to make money right away. Instead, they hope to make even more money.
When an investment starts going up, investors who have made a pretty good profit start telling their friends. When other people hear about the big investment gains, they can’t help but jump in, which helps drive the prices even higher.
The more shares go up, the more greedy people will want them. But greed won’t help you make a long-term investment plan that is reliable and profitable. Instead, it locks many investors into the promise of making more money, even after the price has risen above what would be a reasonable valuation. That puts them at risk of holding on to those shares for too long and losing value quickly if the price goes back down.
Sell For Profits – Not Quell Emotions
Investors should know that greed is as natural as breathing. No one really pays attention to it, even though it affects our lives every second of every day. So, greed can make people make bad decisions, like holding on to stocks for much longer than they should. Because of this, the six words “Buy the fear, sell the greed” are very useful for investing. This phrase is actionable advice that brings the best of years of financial experience and knowledge to all investors, and it could help you figure out the best times to buy and sell.
Example of Buy the Fear Sell the Greed Investing
This year in the month of March the Indian stock market started falling due to the crisis in Ukraine. I was following the Nifty 50 stocks and found that a few of the frontline stocks are highly oversold. People were selling the stocks madly and I started investing in them. To make money in the stock market you need to buy the right stock at the wrong time. This is how buying the fear and selling the greed works.
From the month of March 2022 till June 2022 I invested Rs. 5 Lakhs slowly in the market and it is giving a nice return of 16.70% already. I will exit the stocks once I feel they have reached the overbought zone from oversold levels. Locking in gains at the right time is also necessary.
Check in the image below how I am making decent gains investing in stocks like Britannia, Hindustan Unilever, Larsen and Toubro, Titan Industries, etc.
In the Book “Buy the Fear Sell the Greed”
Larry Connors has written an excellent book on this subject. In this book, he has discussed a few strategies by which traders can buy low and sell high. I am giving the details of the book below.
In this book, I really like the concept of RSI Power Zones. Volatility Trading and VXX Trading Strategy are also effective even in our stock markets. You can buy the book from the link given above.
So it is obvious, that you need to buy when everyone else is selling in panic. You need to utilize this panic to find undervalued stocks, Stocks that will give you profits after the panic died down. The market runs in a cycle. Greed to Fear and Fear to Greed. You need to use the cycle to make money. The Market Mood Index in our Free Tools section can give you a clear idea of the market cycles. We suggest you check the same for buying the fear and selling the greed.