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Why Do Signals Help You Make Smart Investing Choices?
Making smart investing choices is the key to making a profit and avoiding losses. But, how do you make smart choices? What analysts do you listen to and when do you follow the herd versus being a contrarian? There are signals that seem to occur in every market situation. But, why do signals help you make smart investing choices?
Avoiding the Twin Demons of Fear and Greed
When the value of an investment, like a stock, is going up, it is easy to become greedy. And, when the value of that investment starts to fall, it is easier to become fearful. These traits are not limited to you, Ms. or Mr. Investor. They tend to be shared by the majority of investors. Successful long term investors have gone through many business cycles and have come to recognize some basic signals. None other than Warren Buffett has advised investors to be fearful when others are greedy as noted in an article by Investopedia.
Warren Buffett once said that as an investor, it is wise to be “Fearful when others are greedy and greedy when others are fearful.” This statement is somewhat of a contrarian view on stock markets and relates directly to the price of an asset: when others are greedy, prices typically boil over, and one should be cautious lest they overpay for an asset that subsequently leads to anemic returns. When others are fearful, it may present a good value buying opportunity.
The problem with applying this adage is market timing. For example, stocks have been on their way up for years. It is true that the S&P 500 is down on the day, week, and month. And it is unchanged from its value at the beginning of the year. But it is nicely up over 5 years and hugely up over ten years. In this regard, why do signals help you make smart investing choices? One good reason is that they help you avoid letting fear and greed drive your investing decisions.