Nothing makes the emotion of fear and greed more evident in life than the stock market. A very famous saying by Warren Buffett is this:
"Be fearful when others are greedy and greedy when others are fearful".
Even the greatest investor in the world knows how important these 2 emotions are to successful investing. Likewise, you should also learn these 2 emotions well and master them so that you will not fall into the trap that so many people who lost money in the market do.
The emotion of greed is responsible for stock prices soaring. That is what really moves a stock. People do not want to miss out on the moves that a stock make and therefore many go chasing the stock higher.
Imagine one day you heard about a tech stock making a big move of 20% in a single day. Your neighbor bought the stock and now he is sitting on a handsome profit. He brags about it and soon his friends start to buy the stock.
For a few weeks the stock keeps rising because more and more people buy the stock. When a stock is in demand, the price soars higher. Everyone wants to make a quick profit. Greed propels the stock higher. By the end of 3 months, your tech stock has moved from $50 to $150.
One fine morning, the tech stock releases a news that their company is not doing very well in the market. Sales have been slowing down and before you know it, the stock gaps down 20% in just a few minutes.
Your friend has lost about $200,000 from the drop and he soon gets panic and tells everyone about it. Those who have invested in the stock also suffer the same thing and they are afraid that they will lose a lot of money. By the end of the day, the stock ends 40% lower.
As more and more people get news of the drop, fear creeps in and people start to sell more of the tech stock. By the end of the month, the stock has dropped from $150 to $35. $15 below the original price you and your friends bought the stock.
It is not uncommon to see stock move up 50%-100% in a week only to lose all the gains the next week. Below is a chart of Dryships, the stock shot up from around $50 to $800 in a few days only to lose it all and more in a few days time.
Nothing is rational in the stock market when you have human beings that are emotional. That is why you must learn to master your emotions. Warren Buffett said it right, we need to be fearful when others are greedy and greedy when others are fearful.
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