In the immortal words of Mr Gekko, "Greed is good." And while greed can certainly turn into something good for investors greed is just one of the psychological motivators the markets need to operate as they do. The other motivator being - fear. Both are useful. Both are necessary.
Both tempt or instill, by their very nature, investors to make decisions, either sound or unfounded, either calculated or reactionary.
Greed can be a useful driver for investors. It can create opportunity as well as create the greater fool.
A smart investor seizes opportunity while not succumbing to the temptation of chasing investments at their tops and thereby becoming the greater fool.
And fear, well I've heard a number of times in my life, that fear is just meant to warn you of danger and not to make you afraid.
Taking that into account. Don't let fear scare you away from making prudent investment decisions. Just like greed, fear also creates opportunity.
Of the two psychological factors I've mentioned, I feel, that fear is the strongest. Fear drives people away from their investments and drives down the prices of their investments usually much more expeditiously than greed can raise them.
Yesterday, I heard a man speak about markets and investments. The man manages $30 Billion in assets. Paraphrased, basically he said, don't let the markets or market events scare you. If you invest in sound companies and as long as those companies stay fundamentally sound, you'll be just fine.
I like to follow the money. As long as companies are making money and they are transparent about that then I am not fearful.
Market events, like the current Sub-prime scare, I feel, are just that... Events. Events, that yes, carry with them serious concerns that need to be worked out or worked through, but still just events.
And what do we know now about events that scare... well, they also create Opportunity.
Let's peek back to 1998 for a moment when there was a "scary" event. When LTCM blew up in a confluence of associated events it made quite a mess. It was a big move as you will see in the charts from the April 1998 High of over 9,063 to the 7,539 August 1998 Low.*
But then the charts also show how the markets came back. In four months, the market made a new high! In a year, the markets were even higher!!
Events clear out the junk.
Markets discount everything, they correct, evaluate and consolidate. Then they move on.
Take note of this though... sometimes there are very real reasons for why things are scary. So, please make sure to temper your hunt for opportunity with a realistic assessment of the underlying fundamentals. And, that would mean... it's OK to build a position in cash. That would also mean it's OK to be a Contrarian Investor as well.
That being said... understand and define the investing style that is right for you, be aware and do your research. Most importantly, stay objective and don't let market events over take you emotionally, just let the markets present you with opportunity.
* Note: My chart data is monthly so exact High's and Low's are not portrayed.
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