Talk about “fear” and “greed” again

I often refer to Buffett’s famous quote “I am greedy when others are fearful” in my articles. I myself appreciate this sentence very much, but my understanding of this sentence is slightly different from the usual understanding on the market. Recently, I occasionally read an article on the memory of the 2008 financial crisis, which made me feel the need to share my understanding of the difference between this sentence with you in more detail.

First, let’s take a look at what the market usually understands about this sentence. My guess is this: When the price of an investment product keeps falling, it falls to the point of no popularity, and the market atmosphere is extremely fearful, we should enter the market.

This understanding is only partially correct, because it also ignores a premise. What is the premise it ignores? Let’s start with a story from the 2008 financial crisis.

During the 2008 financial crisis, Lehman Brothers and Bear Stearns, the two largest investment banking giants in the United States and the world, collapsed, which immediately triggered liquidity tensions in the U.S. financial sector, and made risks quickly spread from individual investment banks to the entire financial ecosystem and the banking industry. , the insurance industry all suffered. Among them are the precarious insurance giant AIG and investment banking giant Goldman Sachs. If these two giants fall, the US financial industry may really collapse.

At this time, the U.S. government began to rescue the financial industry, including the insurance giant AIG, in order to prevent the risk from spreading further and endangering the entire U.S. finance and economy. But relying solely on the government’s strength to rescue individual companies may not be enough to curb risks as soon as possible, so Paulson, then the US Treasury secretary, called Buffett while he personally went out to put out the fire, hoping that he could also help.

At that time, Paulson made such a phone call to Buffett, and the content was roughly as follows: Paulson told Buffett that the US government would rescue AIG, and once AIG survived, Goldman Sachs would be fine, so Paulson hoped that Buffett would be fine. Give Goldman an emergency blood transfusion.

In this case, Buffett readily accepted Goldman Sachs’ low-priced allotment plan and bought Goldman Sachs generously.

In fact, this is blatant insider trading, but this transaction happened at a time of crisis, and there is no way to do it, so everyone did not care too much afterwards.

Just after Buffett bought Goldman Sachs, Goldman’s stock continued to fall, probably by more than 20%.

In this regard, many uninformed investors began to take the opportunity to laugh at Buffett as before, saying that “the stock god missed” and “the bottom-hunter was halfway up the mountain.” But everyone has seen the subsequent development. After the U.S. government released a large amount of water, Goldman Sachs’ stock price rebounded, bringing huge benefits to Buffett.

The old players still had the last laugh.

In the process, why did Buffett dare to invest in Goldman Sachs after its share price plummeted? I think that aside from the price factor, the most critical factor is that Paulson showed him the cards himself. With Paulson’s assurance, Goldman’s risk is actually close to zero. Under such a low risk, if we look at the stock price again, it is definitely the price of cabbage, so he greedily bought Goldman Sachs without fear of the outside world.

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I don’t think Buffett would have been so quick to buy Goldman Sachs without Paulson’s reassurance. Otherwise, why didn’t Buffett come to the rescue when the stock prices of Lehman Brothers and Bear Stearns plummeted to near zero? And just seeing him save Goldman Sachs? In terms of stock prices, Lehman Brothers and Bear Stearns were much lower than Goldman Sachs before they officially collapsed.

Many seniors on Wall Street once said: In the investment field, many senior investors are risk-averse and uncertain. They strive to find the greatest opportunity while avoiding as much risk as possible. Buffett also often said that the three most important things in investing: the first is capital preservation, the second is capital preservation, and the third is capital preservation.

I quite agree with this point of view. In my own investment in encrypted assets, I also put most of my positions in Bitcoin and Ethereum, and then I dare to use the remaining small positions to invest in various projects with great risks. If there is no Bitcoin and Ethereum It is impossible for me to participate in those high-risk projects.

Let’s go back to “I am greedy when others are fearful”. If we only understand this sentence in terms of price, and think that the price is low and we should buy, then we have to ask ourselves the question: when the price of an investment product has been halved, how do we know that it will not continue to fall, How do you know it won’t go to zero? If an investment product will go to zero, no matter how low its price is, it is not a good investment product.

Therefore, we must first have enough confidence that the risk of it returning to zero is infinitely small, and then we can judge whether its price is low enough to be cheap.

Putting this in crypto assets is even more empathetic: in a market where even Bitcoin has fallen by 90%, and altcoins are ubiquitous, our first task is to ensure that an investment will not The risk of zeroing or zeroing is minimal, and then there’s no question of whether I can buy heavily or I’m greedy when others are fearful.

Therefore, when the entire market plummets or the bear market is extremely depressed, we believe that Bitcoin and Ethereum will not return to zero, so we will dare to buy Bitcoin and Ethereum resolutely when others are afraid, instead of buying it. Enter those altcoins that have fallen more.

Let’s review the Chinese concept stocks I mentioned in the article a while ago. I once wrote that the reason I didn’t buy them when they collapsed was because I couldn’t find a valuation model that I could understand, so I couldn’t tell if there was still a huge risk in their collapsed price or if the risk was basically It has almost been released.

Of course, I also saw Duan Yongping, a senior in the investment community, decisively buy Tencent after the plummet. I believe that this senior must have believed that the stock price plummeting at this time basically no longer has much risk based on the information resources he has. But I don’t have those resources, so I can’t make that judgment, and I’m not going to take the buy action.

So looking at the sentence “I am greedy when others are fearful”, what we need to understand is that we must first make sure that the risk has been released as much as possible, and then judge whether the price is low enough that we can enter the market and buy it.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/talk-about-fear-and-greed-again/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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