Fear & Greed

“Bulls make money. Bears make money. Pigs? They get slaughtered.”
– Gordon Gecko, Wall Street

Dear reader, Fear and Greed are two of the most powerful human emotions. They are the primary driving forces when it comes to the financial markets. Despite standard economic theory, the markets are never in equilibrium. Instead, they are always either in a bull market or a bear market. The question is how you figure out which one we are currently in: bringing to mind a line from the musical Rent: “How do you measure a year…”

Buy low; sell high is a simple way to make money. But simple does not mean easy.

“Widespread fear is your friend as an investor, because it serves up bargain purchases.”
– Warren Buffett, Berkshire Hathaway 2017 Shareholder Letter

A study by Dalbar (2016) showed that while the S&P 500 generated an annualised total return of 10.35% over the 30-year period from 1986-2015, the average asset-allocation fund investor averaged just 1.65%. The reason for this massive underperformance is simple: too many people instead buy high, and sell low. In a bull market, people have FOMO. In a bear market, everyone panics.

Investor behaviour is the single biggest factor driving underperformance in the financial markets.

Even if you have the prescience and discipline to go against market tides, you may not always have the means to. Businesses may trade at cheap valuations during a bear market, but you may not be able to obtain financing to purchase those businesses.

Banks only want to lend money to businesses which don’t need it.

…but “personal fear is your enemy”
– Warren Buffett, Berkshire Hathaway 2017 Shareholder Letter

At the end of the day, markets are not moral. Bravery runs out of the door in a crisis so fast it’s hard to believe, and asset prices can trade at bargain levels. When there is blood in the streets, the ability to allocate capital to opportunities is everything. Empires from the Rothschilds to the Rockerfellers have been built this way.

The question is: will you have the courage to go against the grain? Can you keep your head when all about you are losing theirs?

Yours Sincerely,
Henry Chong