In this episode of the Merkol Podcast, we analyzed the famous Warren Buffett Quote, which goes:
“I will tell you how to become rich. Be fearful when others are greedy. Be greedy when others are fearful”Warren Buffet
How the stock market works currently?
This quote is based specifically on how a person should react in the stock market. If you have not bought any shares or do not have any idea what the stock market is, here is a basic idea about stocks: A company and its share price are not the same.
Confused? I know many will be. Let me explain this further. The progress of the company depends on the work ethic and the competence of its employees and the ideas and vision of its CEO. The share price does not affect the company in any way. But the movement of the share price is decided on what big groups of people feel about the company.
One single person’s thought or emotion does nothing to the direction of the share price. The emotions of groups of people determine it. This is why sometimes mass hysteria causes the stock price to fall even when the company’s financials are top-notch. This might sound absurd to someone who is watching the stock market from afar, but if you are in the game then this feels normal.
People generally buy shares based on what they read online (r/wallstreetbets) or based on which company is being highly talked about in the news. No one actually searches for the company’s investor relations press release, doesn’t check out their quarterly earnings calls, doesn’t analyze if this company and its vision have a future in the industry they are in or how they rack up against their competition. They believe stories they read on the internet without any accountability as to do their due diligence in researching about the company from their end.
This is why bubbles are formed. As more and more people believe the same story, they all invest in the same story. If the story is legit, it’s ok, but if all goes south then the repercussions are pretty bad. For example, the 2008 housing market crash, the 1995 dot com bust.
What does the Warren Buffett quote mean?
In case of bubbles that are doomed for failure, basic research from our end will help us analyze if a certain stock or investment idea is worth pursuing or not. This is what buffet meant when he asked us to be fearful when others are greedy. If everyone is greedy behind a certain stock, it helps us to take a step back and analyze and see if this is worth the hype. This small analysis might save us thousands or even millions in the future.
On the flip side, when everyone is scared and fearful that they might lose their money, they naturally will sell their stock and try to keep hold of what is left of their investment. Even at this time, it is best to again take a step back and see if the reason why you bought the stock is still valid and if the fears of the people have any base to it. Most of the time, it is just mass hysteria.
One perfect example of this is Amazon during the dot com bust.
At the height of fear, Amazon’s stock was trading close to $6. At that time, if a handful of common people took the initiative to check out the financials and see if the company was doing good, they would have been very rich as of today because one Amazon stock is now trading at $3,500 at the time of writing this article.
This is why Warren Buffett quote also mentions that we need to be greedy when others are fearful.
The stock market is filled with stories, it is up to us to do our own research so that we would be well poised to differentiate the truth from all the noise that the stock market spits out every second of the day.
Hope you enjoyed this article. If you did not agree with what I have mentioned or if you have anything extra to add to this article then please do share it in the comments section of this article. Let’s learn together.
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I have recorded a podcast on the same quote. But it is in Tamil. If you know the language then please do listen to this. Do let me know if you like it. Here is the link: