Investors always seem to listen when Warren Buffet speaks. His company buys companies that are undervalued and holds them for long periods. His abilities have ranked him successful throughout the years, and investors want to hear every word that comes out of his mouth because of it.
A famous quote claims that you should be fearful if others get greedy and are greedy when other people are fearful. In a sense, it’s telling you to go against the grain when it comes to investing. While sage advice, it’s a hard strategy to implement.
How the Market Behaves
Investment markets go in cycles. Stock prices tend to rise, peak at the highest amount, fall and rebound. When prices rise, investors see the gain and get excited. They pour money into the market (greed) and want to profit from it. However, the price is what you should focus on and now how fast it rises. Paying too much for your funds or stocks means you’re going to lose money when it corrects itself.
Valuation Is Essential
When stock markets are on the rise, asset values are inflated. The PE ratio means that you can pay a range of prices for just a dollar of earnings. Higher PE ratios usually mean lower stock prices in the future. If you’re greedy, you tend to buy when the price is high and see low returns in the future.
However, when the prices go south, you tend to get scared or panicked. You sell when the price is low, which is selling on the fear. Alternatively, when PE values fall lower, stocks get cheaper. If you wait for that, you purchase the stock at an undervalue, ride out the slump, and see bigger returns later. Companies like EuropeFX can help you learn how to fight greed, buy low, and sell high, giving you a greater return on investment.
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