Chapter Seven: Buy Fear and Sell Greed
Revised and updated | Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor
Audio voiceover:
Substack’s AI-generated voiceover is available from “By David J. Waldron.” To access it, open the chapter in the Substack app. Feel free to share your thoughts in the comments or via direct message. I will use AI to clone my voice for the book’s official audiobook release.
Learn more about audio voiceovers:
https://davidjwaldronbooks.substack.com/p/audio
Haven’t read the previous chapters? Find them here on the book’s webpage:
https://davidjwaldronbooks.substack.com/p/build-wealth-with-common-stocks
Chapter Seven
Buy Fear and Sell Greed
Buy or add common shares in response to surprise socioeconomic events and market fears. Sell or reduce shares in response to surprise company events and market greed.
The intelligent value investor buys a stake in a stable company with strong fundamentals when the market is falling due to fear, then sells or reduces the position when the market becomes greedy and overbuys the stock despite weaker fundamentals or an inflated price — especially when microeconomic factors weaken the company’s financial health or reduce demand for its products and services.
Buy on fear and sell on greed, assuming the share price is attractive or above your cost basis. Erratic market corrections, such as the COVID-19 coronavirus pandemic, notwithstanding, the market tends to favor buying attractive fundamentals at high prices and with narrow margins of safety. As a result, in the later stages of the post-Great Recession epic bull market, the Model Portfolio had become more of a watch list than a buy list.
This chapter explains the macroeconomic and microeconomic effects of intelligent investing.
Attempting to Predict the Market is a Fool’s Game
When the market timer is incorrect, predicting a surprise market, industry, or company event can lead to substantial asset losses due to being too long or short.
On the other side of the trade, the patient investor is ready to capitalize on the event by using planned cash reserves to buy more or new shares of companies with solid fundamentals.
The disciplined investor capitalizes on depressed prices caused by unpredictable macroeconomic events. These incidents, regardless of any tragedies, present a contrarian’s opportunity for a thoughtful individual investor.
For example, investors who held, added to, or initiated quality positions after the market crash of 1987, during the dot-com bear market of 2000–2002, or the run-up after the Great Recession of 2007–08, profited from subsequent booming portfolios. The market meltdown caused by the coronavirus pandemic created similar opportunities for bargain hunters in March 2020. A few predicted these events, and perhaps each one benefited from luck. Many investors responded by selling already depressed securities afterward, and several of these victimized portfolios had yet to recover.
The investor who predicts a significant market, industry, or company event often gets carried away by their lucky call. They begin to develop an investing philosophy based on their newfound ability to predict future outcomes. This intoxication of financial judgment leads to the false belief of having a crystal ball. With poetic justice, the luck eventually runs out, along with the principal on the investments.
Unless someone has the incredible instincts of Warren Buffett.
Fear and Greed as Pricing Mechanisms
This chapter supports a value investing theory that suggests being greedy when the market is fearful by buying during a macro event affecting the entire economy or sector, or a micro event limited to a specific company or industry. It also advises being fearful by selling during a macro or micro event that sparks widespread market greed.
Widely attributed to Buffett, the metaphor of buying when there’s fear and selling when there’s greed created the most famous value investor of our era.
The lesson serves as a reminder for independent investors to avoid market timing or stock trading, instead basing their decisions on macro and microeconomic factors. Such discipline involves a contrarian’s step back from the crowd. The prudent value investor follows a proven approach, researching a company’s fundamentals to evaluate its potential as an investment. And when appropriate, they analyze the valuation multiples of the underlying stock to determine whether to buy, add to, hold, reduce, or sell the position.
The patient value investor remains steady, waiting for unpredictable macroeconomic events that often cause panic-driven sell-offs in stocks on Wall Street. As prices drop to attractive levels, review your watchlist for strong companies with solid fundamentals trading at fair multiples, offering what you see as sufficient margins of safety.
As an alternative, consider adding dry powder to your current holdings, as the first and seventh ideas already in your portfolio might provide better value than a new market opportunity. Whenever greed takes over—affecting the valuation or fundamentals of a single holding—think about reducing or selling your position at a profit. Conversely, if an economic event or trader-induced fears create valuations with perceived wide margins of safety, consider taking a new position or increasing your existing one.
In the wake of fear and greed, the value investor reemerges to seize rare opportunities to start new positions because high-quality companies rarely trade at bargain prices except after market downturns. To paraphrase Buffett, as the bull market tide recedes, the junk equity holders are left swimming naked.
Suppose you buy a quality company at a fair price and the company’s value proposition remains strong. Why would you sell unless to fund new opportunities or pay for an upcoming milestone in life with the proceeds?
Again, the value-based investor possesses the temperament of a contrarian.
Buying is Exhilarating — Selling is Exacerbating
An often-overlooked challenge for any investor is deciding when to sell a holding.
Execute a sell order to lock in profits with a more proactive and well-considered decision process instead of reacting impulsively. The occasional “good idea at one time” investment can lead to selling the persistent underperforming stock to prevent further losses. The fundamentals-driven value investor sells or reduces a part of the business if it no longer aligns with the investment thesis.
There was a time when I sold stock just as much as I bought it. The share prices of many of those companies I sold are higher today. Selling a stock out of fear of current or future events often works against the best interests of the investor. Just ask Apple (AAPL) shareholders—myself included—who went bearish based on Wall Street analyst forecasts after the death of its founder and icon Steve Jobs in 2011.
Therefore, as the innkeeper, I must write occasional follow-up alerts on the common shares held in The Model Portfolio as evolving fundamentals and metrics require. It is important to remember that long-term results are the best indicator of equity performance for dedicated individual investors.
You don’t need to chase quarterly performance, like many on Wall Street and the crowds on Main Street. That’s why, as explained in the investment goals of The Model Portfolio and discussed in Chapter Five, patience is the best friend of the value investor.
Sell to Take Profits — Not Suppress Emotions
Lately, I’ve traded less frequently, realizing that continuous buying and selling fuels the Wall Street fee system more than it generates positive returns from my portfolio.
I sold three stocks from The Model Portfolio during the post-Great Recession bull market. Murphy’s Law permitted the prices of two of them to rise significantly before the COVID-19 coronavirus correction.
When purchasing solid, long-lasting companies at reasonable prices, there are fewer reasons to sell other than to fund a significant life milestone. Consider taking profits from a long-held common stock to pay for college tuition, a wedding, a home, a new business, or retirement. Your approach to investing in common stocks should be logical. Aside from celebrating or having a brief pity party, emotions and feelings have little place in successful investing.
During the extraordinary 2009 to 2020 bull market, individual securities continued to display strong fundamentals and attractive dividends; however, prices were high relative to acceptable valuations and margins of safety. No matter how we assessed the subjective estimation of intrinsic value, the stock prices seemed stretched. Maybe the market will keep rising. Who knows?
Then, the coronavirus pandemic hit unexpectedly.
Counter rising impatience on Wall Street by practicing patient risk management and waiting for the prices of targeted stocks to reach acceptable levels. Avoid predicting specific macro or micro events outside your control, and leave unpredictable moves to speculators who own the stocks or bonds of companies with questionable business models.
When an unexpected event occurs, it often creates a buying opportunity for the common shares of quality companies, even during temporary economic or industry downturns. The disciplined value investor typically waits for macroeconomic, geopolitical, or microeconomic company events to lower the stock to a bargain price.
Also, be cautious of the price fluctuations of commodities such as energy, basic food ingredients, and precious metals, to name a few examples. Although appealing to investors with Type-A personalities, such commodity pricing is often manipulated legally by producers or traders, thus surpassing the basic economic theory of supply and demand.
As such, the disciplined investor on Main Street, with few exceptions, avoids direct investments in commodities or in companies within the energy and materials sectors that produce and market raw materials. Focus on investing in businesses rather than engaging in pricing arbitrage. On the contrary, be willing to own companies that use commodities to create useful products, or you risk missing out on a wide range of quality, publicly traded enterprises.
Insiders Trading and Share Buybacks
It is astonishing how C-suites and boards of directors often house some of the worst value investors in managing buybacks and stock options.
I stopped tracking insider selling some time ago because the motivations behind each private exercise or sale are unknown. The reasons may include: options expiring, tuition due, a new vacation home waiting, a director’s board term ending, or the seller’s wealth manager recommending portfolio diversification beyond the company stock. The motives for exercising options and selling holdings are endless.
As a real-world example: I was fortunate to receive stock options in a previous job, which colleagues and I sold at various times for personal reasons. I observed a notable increase in company-wide sales disclosures following the vesting or expiration of a blanket option grant, irrespective of the company’s performance or outlook at the time.
Instead, concentrate on companies with credible value propositions whose stocks are trading at reasonable prices, despite market forecasters trying to sway you elsewhere. The skepticism of these prognosticators, including their followers, creates a temporary mispricing. Why are there such widespread commitments to this narrow approach?
After twenty years of studying, observing, and practicing equity investing through trial and error, buying the value-priced common shares of quality companies is the one approach that has consistently been profitable. The lesson: You can’t sell an overpriced bull to a value-minded butcher.
In the Pursuit of Quality
During the research for this book, the Wall Street consensus appeared as an overheated bull market where speculation dominated as investors overlooked valuations.
Shorting was probably the exception, but they still traded on speculation. Because of the climate, portfolios resembled watch lists more than buy lists. Remember to look for excellent, publicly traded companies with strong fundamentals that inspire you to become a proud owner. Support companies that provide quality products or services and consistently demonstrate profitability and abundant free cash flow.
The lesson is to practice patience and discipline ahead of unpredictable macroeconomic surprises or the market’s fearful retreat from stocks. Each opportunity is an ideal time to add targeted dividend-paying common shares of select companies to your portfolio.
Call me an idealist, but I prefer contributing to our family and society by owning a stake in a company that provides quality and value to a world in need. Great businesses always find ways to endure by overcoming internal micro issues or external macroeconomic and geopolitical challenges. Since pursuing quality plus value works well in many areas of our lives, it is essential to include investing in this realm.
Avoid celebrating adverse macro and microeconomic events, as they can harm fellow workers and investors who are affected by the economy, a sector, stock, natural disaster, or health crisis. Instead, revisit your portfolio and watch list and start new research to find individual companies where strong fundamentals, sensible valuations, and comfortable margins of safety come together in a rare perfect storm of opportunity.
As an everyday investor on Main Street, it’s wise to be an aggressive buyer when the market is fearful. When the market or management becomes greedy in an over-invested company or industry, adjust your strategy by reducing holdings or selling, as suggested by key indicators.
Pursue alpha with rational thinking, reserving any emotion for celebrating successes or evaluating failures after the trade — never before. The lesson for the independent investor is to stop market timing or stock trading and start investing or divesting based on micro and macroeconomic conditions. Such a contrarian’s retreat from the crowd requires gathering the rarest commodities: thought, common sense, patience, and discipline.
CHAPTER SEVEN SUMMARY
On Fear and Greed
The value-based investor exploits pricing driven by fear and greed.
Buy shares of strong, reputable companies when macroeconomic events or market fears cause prices to drop. Sell or cut back on holdings when microeconomic factors or market greed weaken fundamentals or reduce demand for products and services.
The thoughtful common stock investor never tries to forecast a market, industry, or company event but instead gets ready to benefit from surprises after they happen.
Great businesses find ways to survive by navigating external macroeconomic and geopolitical challenges or internal micro issues.
Whether driven by geopolitical, market, industry, or company factors, investment and divestment opportunities arise throughout every market cycle.
This updated chapter is copyrighted 2021 and 2025 by David J. Waldron. All rights are reserved worldwide.
Next in Build Wealth with Common Stocks | Chapter Eight: Hedge As An Alternative to Indexing
Universal links allow you to preview or purchase David’s published print or ebooks — each available globally at your preferred online bookstores — with one or two clicks, brought to you by our trusted partner, BookFunnel.
Share the “By David J. Waldron” author website with your network to earn credits for a premium subscription that provides full-text and audio access to all of David’s manuscripts and updated chapters of his published self-help books.