Are You Greedy Now

If you are a serious investor, you must have heard of the famous Buffett saying, “Be fearful when others are greedy. Be greedy when others are fearful.” Well, it’s easy to understand the idea, but very difficult to practice. The key is “when”.

Let’s look at the movement of index fund “QQQ” during the year-to-date bear market, there were two big rallies, only to lose ground to go further down again.

Invesco QQQ Trust (QQQ)

If you were greedy around mid March, you would have enjoyed a good rally, only to give back and fall further down later. The same scenario would happen again in July. Obviously, there were quite many people being greedy to have a good rally in a bear market, while there were even much more people being fearful in the first place to have a lasting bear market.

It seems that the winning formula “Be greedy when others are fearful”, doesn’t always work. If you became greedy too early while more people kept turning fearful, the market went down, even with much more people having turned fearful earlier. Only when the power of fearful is near exhaustion, the greedy side has the chance to win.

How do you know how many percent of people in the market being fearful? To be more accurate, you need to know the percentage of capital controlled by these people on the fearful side. If that percentage was over 90%, your greediness would win huge, simply because downward power of the market is near exhaustion.

However, there are no such market statistics available. You have to rely on your gut feeling. But gut feeling is not reliable. The next thing is the chart. By looking at the chart above, you might think QQQ already reach the bottom at early Nov, which is showing a quite strong signal until the chart of coming 3 months telling you otherwise, because if a recession came in 2023 and lasted longer than the market having expected, all the stocks and indexes would go down further. Although almost everybody is talking about recession this time, no one for sure whether it will really come and how sever it will be.

Only one thing for sure: Nobody knows where the bottom is. The only reliable indicators I learned from my almost 20 years of investment experiences are the valuation results based on fundamentals. If you look at the PE for QQQ on Yahoo Finance, it is 22. Based on QQQ’s historical data, PE at 22 is cheap. But you cannot analyze QQQ like an actual company and cannot tell whether companies included in QQQ will survive in a recession.  I eventually bought Microsoft in early Nov at $215 simply because Microsoft is a tech blue chip and it will most likely not only survive a recession, but thrive when everyone is struggle to “achieve more” with less. And most importantly, I could analyze it as a company with all the data available and concluded that it’s cheap at $215 with enough margin of safety.

Since then, the market has been fluctuated wildly. However, price of Microsoft has gone up 12% since 8 Nov while QQQ has dropped back to the same price level. Obviously, there are many investors have reached same conclusion on the value of Microsoft in the market, while it’s difficult to evaluate an index fund like QQQ, which is much more affected by the outlook of economy development in near terms.

In short, valuation is the No. 1 factor to make investment decision. Greed and fear in the market only helps you to get better prices.

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