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Warren Buffett once said, "be fearful when others are greedy and greedy when others are fearful." I don't think there is a single piece of advice related to the stock market that is more important than this piece right here. I absolutely love this quote. Even though this is a famous quote, it is one that is shockingly not very followed. People love investing during good times. When the S&P is hitting new highs almost daily, a lot of people want to keep investing because they see their net worth increasing so much everyday. When the S&P is falling almost everyday, a lot of people don't want to invest in it because they believe there net worth will continue to fall. It's basic human psychology, yet it is the opposite of how people should think.
Bear markets are a true gift to a lot of traders because it allows us to get a lower cost basis on the stocks that we believe in. If one finds a stock that they like that is 10 bucks a share and then it crashes to 5 bucks a share, they have the opportunity to lower their cost basis to $7.50 a share which is a much better price. Then when things recover, they make more money. By the stock decreasing, more opportunity was created.
As stocks continue to fall right now, I'm seeing people become very fearful. A lot of people are terrified that we are going into a multi year recession, and they are terrified to buy more stocks right now. I don't know what is going to happen, and I am not going to pretend that I do. I do know that per Buffett's quote, I should be as greedy as possible. Because of this, I am investing a larger percentage of my income than ever before while the market is down. When things recover, I will slow my buying down because that is when I should be fearful.
Bull markets create overvalued companies. Overvalued companies create bear markets. When one sees stocks doing well, people get the urge to not miss out and people start investing that normally never would. This leads to companies becoming overvalued.
Something that I fully believe in, is that if one buys a stock at $100 a share and they did that because they looked at the company and believed that this was a good price to get into and the stock then falls to $50 a share, they should ask themselves one question: did the thing that convicted them to buy the stock at $100 a share change. If no, then they should be buying more because if a stock is a good deal at $100 then it is an even better deal at $50 because they get the same thing for less money.
Stocks are the only thing I know of where people get mad when they get a better deal. If someone is clothes shopping and they see a shirt that is 50% off, they get excited, but when someone is business shopping and they see a share of the business that is 50% off, they panic. I feel like they should be ecstatic that they get to buy a piece of a business at a much better price.
As I continue to see stocks that I believe in at what I believe are discounted rates, I will continue to be greedy because that is when I believe that real wealth is made.
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