Warren Buffett is a man who knows a thing or two about making money. The American investor is widely accepted to be one of the richest (if not THE richest) men in the world with a personal fortune of around $60 billion.
And it’s all come from making sound investment decisions. So when he talks, you’d be stupid not to listen, and it would be strange if you didn’t hear something useful. Here’s what he recently had to say about the psychology of investment:
“Be fearful when others are greedy and greedy when others are fearful.”
I think the point he was making was that when greed takes over, reason and solid principles fly out of the window. The end result is that prices no longer reflect underlying values. It’s not a time to buy.
But when there’s a downturn and fear takes over, the reverse happens. Panic sets in and there’s an over-compensation in the downward movement of prices, thereby creating the opposite relationship between value and prices and an opportunity.
He was probably talking about stock market investment, but I got to thinking about what he said in relation to the property market ~ something I know a bit more about.
Isn’t it strange that investors flood into the market when prices are rising (in other words, a sellers market) but flood right out again when they go down again (a buyers’ market). It makes no logical sense, and can only be explained in terms of the ‘sheep’ mentality which is the prevailing mind set.
The typical investor is motivated by greed when the market is rising (it looks so easy) and fear when it starts to fall (it’s not easy any more…where will it all end?)
Savvy property investors know the truth of what Buffett says and are acting on it right now. If anything, they cut back on their acquisitions in the latter part of the property boom, fearing that they might be paying too much in a market boosted by the greedy sheep.
But once the tide turned – and the sheep had become fearful – their greed glands went into full production. The savvy know that some of the fearful sheep will panic (and with good reason if they overstretched themselves during their greedy period) and will over-compensate, by offloading their property at a give-away price.
Savvy investors continue to do what they’ve always done ~ the opposite of the crowd. And why would you do anything else? Run with the crowd and you get what the crowd gets: the average, the mundane, the ordinary. Run against the crowd though, and you get completely the opposite…
And extraordinary beats ordinary every time. Just ask Mr Buffett.
Kind Regards
John Harrison
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