Fear and greed

In One Sentence

Nobody can say for sure whether stocks will rise or fall tomorrow, but the crowd's mood is always swinging between greed and fear, and it rarely rests in the middle.

Why It Matters

When the market is hot, even friends and relatives who never touch stocks are handing out hot tips; when it's cold, nobody wants to hear about stocks at all. Individual investors mostly get hurt because their emotions push them to chase prices up and run when prices fall. Since you buy only the broad market, here's how I use this idea, in one direction only: when the pendulum swings to fear, buy more; when it swings to greed, just remind yourself not to borrow and not to add extra — but don't sell, either.

One Number

In the ten years to the end of 2009, the American fund CGM Focus made about 18% a year on average, yet its investors, by buying high and selling low, lost about 11% a year on average (Morningstar · Chapter V).

In the Book

Chapter IV compares market mood to a pendulum. Section 2 of Chapter V covers the "temperature of people." Chapter VI turns it into a thermometer checklist you can look at every week.

Go Further

• Market cycles The swings in mood are what drive market cycles.
• Market thermometer The thermometer turns mood into numbers to help you manage yourself; it's not a buy or sell signal.
• Howard Marks Howard Marks uses a pendulum to describe market mood.
• Buying in crashes The crashes that fear brings are chances to add more from new income.
• Borrowing and leverage Greed is when you most want to borrow, and exactly when your head is least clear.