The market can become quite noisy with numerous tools available to gauge market sentiment, including the Greed VS Fear Index.
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What is Greed VS Fear Index?
If you are wondering what is this about, the Greed VS Fear Index is a way to gauge stock market movements and whether stocks are fairly priced. The theory is based on the logic that excessive fear tends to drive down share prices, and too much greed tends to have the opposite effect.
The current market sentiment is quite greedy. So in theory, investors should exercise caution and refrain from investing.
While these tools can be beneficial in the short term, they often prove to be ineffective in the long run. But why?
In February 1993, Howard Marks wrote to Oaktree clients, "The average annual return on equities from 1926 to 1987 was 9.44 percent. However, missing the best 50 out of those 744 months by going to cash would mean missing all the returns. This suggests that attempts at market timing pose a risk, rather than providing protection."
Gautam Baid, the author of "The Joys Of Compounding" also highlighted that a significant percentage of the total gain from a bull market usually occurs during the initial market recovery phase. "Investors missing this phase are likely to miss a substantial portion of the gains."
Hence, investors shouldn't fixate on high-frequency macro indicators. Instead, they should concentrate on individual businesses and their industry developments. Gautam emphasized, "That's the best one can do—nothing more. Always remain humble and intellectually honest."
By the way, I highly recommend you to go and read "The Joys Of Compounding". It's one of the best and most insightful investment books I have ever read.
Ultimately, focusing on fundamentals has consistently made investors significantly wealthy over time, as demonstrated by Warren Buffett.
Buffett once remarked, "Fear is the foe of the faddist, but the friend of the fundamentalist. In the next 30 years, major shocks are bound to happen. We won't attempt to predict or profit from them. Identifying businesses akin to our past purchases will minimize the impact of external surprises on our long-term results."
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