Wednesday, September 10, 2008

The Fear Side of the Greed and Fear Cycle

“The only thing new in this world is the history that you don't know”
Harry S. Truman

Just as day follows night and spring follows winter so, too, does investor psychology follow the seasons of emotions from greed to fear and back. Behavioral finance rules and the Efficient Market Hypothesis remains a hypothesis. Loss aversion over risk aversion.

So, to help investors in need of a little timely perspective, the above two charts (click images to enlarge) reflect the ever reliable greed/fear cycle quite nicely.

Investment Strategy Implications

The contrarian in me believes in the Baron Rothschild saying, "The time to buy is when there's blood in the streets". It is an investing example of President Truman's quote and a testament to the reliability of the greed/fear cycle. Therefore, since the epicenter of the current fear cycle is the Financials, I can't help but notice the recent relative strength in Financials in the midst of outright panic.

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