Even if you are not involved to investing there is no chance you haven’t heard about Warren Buffett – one of the best investors in the world. His history of success is a matter of dozens of researches and thus his advices and recommendations are usually highly valued by those who get involved to investing.
So one of the most famous and credible advices you heard from Warren Buffett is “Be greedy when others are fearful, and be fearful when others are greedy”. Which means that basically Mr. Buffett recommends to play against the market and make the most unpopular and unpredictable moves on the contrary of the majority of other players on the stock market. However, you should not accept this advice literally as it has some limitations for usage.
Make Sure You Know How Market Works
Usually you can notice that there are cycles for markets to work on – companies’ shares grow or fall and sometimes you can see rather weak relationship between the price change and company’s performance. For example, when company’s price starts growing you can notice that other market players are purchasing shares as fast as possible to sell those for a higher price later.
That’s what Buffett calls greediness in his advice and he recommends to choose reverse tactics when most of the market players are behaving like that. And it is a good piece of advice as you should know that there is always a commission taken upon transaction and the income from operation is taxed so usually there is no sense in buying and selling when everyone does the same as market corrects rather quickly so you cannot make maximum of profit.
Consider Stock Market Valuation
The one factor you should always consider is the stock market value – whether it is rising or falling. Due the past decades the market raised dramatically with shortfalls though so your task as an investor is to provide brief analysis on whether market is rising now and what kind of deals would be the best idea on the current position.
When the stock market is starting to fall – this is the moment when most of the investors become fearful and start selling and that’s where you need to become greedy as Mr Buffett says. Why? Because in such an occasion when all market falls and stock prices fall as well most of the investors are being and panic and thus they do not provide proper estimation of assets owned. As a result most of the assets become underestimated and sold out for the price which is far lower than the fair one. So you should make sure you see the companies that costs more than marketed.
Such a strategy which is based on earning on market players’ mistakes is a good way to make successful long-term investments just because you know how the market works.
For Most People Active Fund Investment Management Is a Losing Bet
This is Warren Buffett’s conclusion he made after years of successful work on a stock market. Why is he saying that? Well, the reason is that he made some research which has shown that most of the amateurs that made long-term investments in one or several companies without selling stocks in case of price rising or falling made more profits than most of the professionals that made thousands of deals per year connected to purchase and sales of stocks.
The reason this fact has arisen is the fact that there all the deals on the stock market – especially short-term ones are taxed and submitted to commissions which significantly decreases margin from each deal separately.
Another reason is the fact that professional traders are usually only considering short-term factors when making investing decisions. On the contrary, business owners and managers make plans for years or even decades and these plans usually include falls as well with rises consequently.
For example, if there is a company A on a market that is already existing more than 5 or 10 years it is likely that it has a plan for any occasion and even if it loses competition the loss won’t be critical. Anyway, this A company is likely to improve capitalization each year on several percents and the longer it exists the less are the chances some risks are uncovered and the more reliable asset it becomes, the more is the market share.
One more example – this company A may costs $13 per a share today. But in a month the price per share may make $7. What is going to a professional trader? He will usually start selling company’s shares at the moment he sees those are starting to fall. However, this may not be an end the company A as due to the good management and new technologies researched to company managed to increase share price up to 97$ for five years. So if you have just bought the shares as long-term investments and did not give up on the company you can get more that 800% capitalization of your assets for five years – which is rather hard to achieve if you are a regular professional trader making short-term deals.
So if you are an amateur investor that has bought a share of a company on a stock market as a long-term investment you are likely to earn more in most of the occasions than a professional trader. And this was said by Warren Buffett – a person that provides sustainable 20% growth of capital annually for his investors.
Before using an advice of authority make sure you understand its essence and conditions under which adhering this advice would be the best strategy. If you want to know more about stock market investments and diversification of assets please read this article.