THE SEVEN FUNDAMENTAL BELIEFS - Belief #2

"Investors will always be driven by fear and greed, and the over-all market and stocks will react accordingly. This volatility is simply the cost of doing business. The two most common emotional reactions to the stock market are fear and greed. Fear forces stocks below intrinsic value, and greed forces stocks exceed-ingly above intrinsic value. This fear investors have that they will lose all of their money, and stocks will go to zero, causes many in the marketplace to sell at a frantic pace, liquidating their investments in stock holdings and mutual funds. Redemptions from these funds run high, and professional money managers, particularly value money managers—against their own choosing—have to sell shares of companies well below their true worth, pushing stocks down even further. It can ultimately become a vicious cycle. Normal economic cycles or a sudden drop in the stock markets typically gets this cycle going. Greed has the opposite effect. Investors bid up prices for stocks or refuse to sell overpriced securities in the hopes of squeezing every bit of potential profit possible. Excessive optimism and fear are the enemies of the rational buyer. Therefore, the value investor is often fearful when the market is greedy, and greedy when the market is fearful. The value investor’s frame-work controls one’s tendency to become too fearful or too greedy."

THE SEVEN FUNDAMENTAL BELIEFS - Belief #2