Monday, November 11, 2013

How Do You Invest in a Market That's Fearful and Greedy?

To paraphrase Warren Buffett's aphorism about investing, be greedy when others are fearful and fearful when others are greedy.  In other words, buy low and sell high.

But what do you do when the market is beset by fear and greed?  Market indexes rise to new heights almost every day.  But many investors are increasingly stepping back and hoarding cash.  Indeed, the greedier some get, the more fearful others get. 

There's no established strategy for a pishmi-pullyu market like this.  The fearful, greedy market's bipolar movements defy logic and rationality. 

Much of the market's wackiness comes down to the fact that asset values today are determined as much by government policy as anything else.  We live in the era of the Great Central Bank Accommodation, spiced up with bailouts of one sort or another as ad hoc government policies are slapped together in response to the crisis du jour.  Even though the central banks mutter disquietingly about withdrawing accommodation, they don't really get around to it, because they remain the only show in town when it comes to economic stimulus.  Investors know that government intervention is likely to continue indefinitely, so some invest.  They are also fearful because they know that government support cannot continue forever.  So some hoard cash. 

You can't rationally invest on the political process or government policy.  You can diversify.  That's simply another way of admitting you don't know what's happening or what's going to happen.  Then again, no one does.

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