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Whenever I come across a quote that either strikes me as brilliant, confusing, or a combination of the two I whip out my trusty iPhone, Android phone, or Obama Phone(money gets tight now and then) and start doing my research. In this case it was Warren Buffet who famously has said this time and time again. So who the heck is Warren Buffet?" According to Wikiopedia, "Warren Edward Buffett ( born August 30, 1930) is an American business magnate, investor, and philanthropist. He is currently the chairman and CEO of Berkshire Hathaway. He is considered one of the most successful investors in the world and has a net worth of over $105.2 billion as of November 2021, making him the world's tenth-wealthiest person".
At this point in our research(aka typing the quote into google) and after reading even the first few paragraphs of his Wikipedia Page, it would be reasonable to say that Warren Buffet possesses the kind of information and or intellect that intellect that most of us could only dream of having. So we've established that the source of this quote is credible.
For the sake of time I will cut to the chase and tell you what I think it means and if you think differently by all means leave a comment below as I am always open to differing viewpoints or different ways of interpreting things. What Mr. Buffet means is that the stock market is by in large driven by the investors emotions rather than their rational thoughts and beliefs. Here is a perfect example: When any given market begins to crash violently investors let their emotions take over and they sell rather then analyzing the intrinsic value of the company and if the crash is justified.
Conversely, when the market or a stock is going through the roof investors often get a severe case of FOMO(Fear Of Missing Out) and they may begin to buy a stock that is far overpriced in comparison to its Price to Earnings ratio or again its intrinsic value. This is when buying stocks becomes a game of speculation rather then buying based upon what a stock or cryptocurrency should really be valued at. A perfect example of this was in early 2000 when the DOT COM bubble burst. Fortunes were lost overnight.
So how can we apply this to our trading in order to profit....do what Warren does. When Jim Kramer is yelling "SELL! SELL!" on mad money and the investors are selling their portfolios for pennies on the dollar....USE YOUR HEAD AND DON'T LET EMOTION DRIVE YOUR TRADING! That would be how you lose money. Instead, add to your position and wait out the storm.
Similarly DON'T LET YOUR FEAR OF MISSING OUT ON LARGE PROFITS get in the way of rational thinking. If everyone is buying a stock that is overvalued either sell most of any of the stock you have and wait for the market to start thinking clearly again or bench yourself so you don't end up being a bag holder aka the sucker who buys at the highest price only to be left with massive losses when all the other investors sell their emotion based buys.
I hope that helps some of you to trade based on rational vs Emotion. Until next time, Cheers!
