When Greed Meets Fear

In Oliver Stone’s classic 1987 film Wall Street, corporate raider and Wall Street maverick Gordon Gekko – a role that earned Michael Douglas an Oscar as best actor – makes one of those iconic Hollywood speeches espousing the virtues of greed. “Greed is good” was the takeaway, because it drives the engine of capitalism and innovation. Though the film was meant to be an indictment of the excesses of capitalism and of the quick-buck mentality that supposedly reigned in Wall Street at the time, both Stone and Douglas commented over the years how people would approach them and say they became stockbrokers because of the characters of the film.

I was a freshman at Stanford when the film was released and remember how the “greed is good” speech caused quite a stir on campus, with many of my colleagues commenting that Gekko had a point – after all, is not the pursuit of profit the main objective, the raison d’etre, of any company?  The other side, of course, pointed to all the evils and crimes committed in the name of greed to show that greed does indeed deserve its place amongst the seven deadly sins.

Regardless of whether you agree or disagree with Gekko’s premise, there is no denying the prominent role that greed plays in investing. Many people begin investing with greedy goals, and it’s usually because they hear about how well others are doing.  The pull of greed is so strong that even some of the most conservative people eventually succumb.  Because they resist the longest, they are often the ones who lose the most by getting greedy near the top and fearful near the bottom.

Greed and fear are in our genes, and both have helped humans evolve and survive. Without greed, a person or society may lack the motivation to do any activity of creation or innovation.  Without fear, we would all have been eaten by lions and failed as foragers.   To invest for the long run, it is critical that we keep both greed and fear in check.  While they are said to counterbalance each other in markets, that’s not exactly true of long-term investing.  Decisions inspired by one’s emotions or that of others are prone to be suboptimal.  The best decisions are those that follow an unemotional gameplan, like buying stocks of companies that have great management, are a high-quality business and whose market is experiencing secular growth. It is not easy to find such outstanding companies, and often it is even harder to stick with them while others are being greedy or fearful, but this is the best way I know for building wealth through investing.

Buffett endorses being greedy when others are fearful, and fearful when others are greedy, but this is advice coming from a man who has a long track record of controlling his urges and doing nothing when others are being active.  If you are someone who struggles with fear, then being greedy when others are fearful might in fact be a bad move.  If you are going to capitulate, goes an old Wall Street adage, might as well do so early.  The best approach, though, is to find a way to keep greed and fear out of the picture.  I know it’s easier said than done, but here is my suggestion: find an investment philosophy and program that makes sense regardless of whether people are fearful or greedy and stick with it for the long haul. By making fear and greed irrelevant, your chances of achieving your investment goals will be much higher.

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