“Be fearful when others are greedy, and be greedy when others are fearful”

This is one of the maxims pronounced by the successful Omaha oracle, Warren Buffet. If we consider that he currently ranks third among the richest men on earth, with a fortune estimated at just over 80 billion dollars, it may be worth paying attention.

There is no doubt that, in terms of form, this quote is appealing, and based on the symmetry it becomes memorable. As for the depth of the advice, this famous phrase appeals to emotions, which echoes loudly in the readers mind.

This quote seems like another interpretation of the advise “buy low and sell high”, if we assume that “fear” leads to low prices, and “ambition” signals high prices.

Following this recommendation would most likely benefit our finances; however, a couple of points that could complicate its execution come to mind.

1. How would you measure fear / ambition properly?

If we understand that “low prices” reflect “fear”, how low should they be to take advantage? And vice versa, how high should the market be to reflect ambition?

The stock markets have shown us valuable lessons over time, and one of them is that they can remain irrational for long periods of time.

If we define that the best time to buy is after a fall, how big should it be? If we follow the definition of a bear market, would we only buy when stocks show at least a 20 percent fall from their previous high?

On the other hand, if we consider the opposite performance, as a clear sample of ambition, and sell each time the market accumulates advances of 20 percent, would not we be capping our profits?

I understand that context can be very helpful, and as some say “I will know when I see it”. The problem of leaving subjective criteria is that emotions are hard to cope with.

2. How to control fear or ambition?

Fear and ambition are feelings, and for that reason, I believe that acting against them poses a great challenge. 

Although fear as such is an intangible to a possibility, the narrative that determines it can evolve quickly to solid arguments. For example: “the markets are falling because the rates are rising, and hand in hand the risk premium, anticipating a lower net present value of future flows, which may also be lower …”.

As you can see, the arguments can make sense, and at a certain moment lead us to react to our detriment. Let’s analyze a visceral reaction to the scenario raised above.

If the headwinds do materialize, the stock prices could fall even more, so I could decide to leave now … and with that money … I could invest it in fixed income, in real estate, or I decide to jump back into the market further down the road.

Investing it in fixed income could mean losing liquidity and tying up to a rate, which might stop being attractive at some point. The value of real estate would also see adverse effects in relation to the market rates. And going back into the market sounds right, but at what lower level?, what happens if it does not go down any further? Would you buy back at higher levels?

In the case of ambition, I once heard an interesting definition of “financial bubble” by a portfolio manager: a bubble is a financial asset that not buying it would get me fired.

Here one must have control over eloquent and alluring narratives that try to justify increases in asset prices. Further more, you should overcome the fact of seeing a large number of people, friends and enemies, increasing their net worth, while you remain on the sidelines. The FOMO or Fear Of Missing Out.

All in all I think it is well worth being “rational” when others are greedy, and being “rational” when others are fearful. And since it is difficult to impose rationality on both ends, plan ahead and stick to the execution of it.

If our investment horizon is aligned to a long term, and we continue to contribute on a regular basis, adverse market scenarios will be opportunities for us to take advantage of and test our will.