In nearly any part of life, it can be beneficial to listen to the advice of those who have experience and have had success.
And when it comes to the stock market and making money, Warren Buffett has plenty of both.
That’s why we can extract a great deal of wisdom from his golden rule of investing…
In a classic line for investors to follow, Buffett shed light on his trading and investing strategy with this quote:
“Be fearful when others are greedy, and be greedy when others are fearful.”
This line is what Buffett said dictates his buying in a 2008 New York Times piece.
Whether you know this quote already or not, there is no denying the power of this statement. And it has proved to be true time and time again.
And if Warren Buffett uses this rule as guidance in the stock market, shouldn’t we?
What Buffett is saying in this quote is that the masses live by fear and complacency, and we should be doing the exact opposite.
When the masses become greedy and complacent, they buy up all they can in a market that they believe will never stop climbing. But this is a warning for us.
That market could be heavily overbought, and the massive buying could be like a finger pulling a rubber band back as far as it will go just before it snaps back.
In such a case, Buffett (and you and I) would grow fearful as the masses grew more complacent. And that would mean that we would take up protective positions as the market became overbought.
Then as the rubber band snaps back against the complacency, we would be able to protect our investments AND be prepared to profit from the downturn.
And the same would be true when the masses become fearful.
Fear can be even more powerful than complacency and greed, but that just means that the rubber band would be pulled back even more when fear is rampant in the market.
When that happens, you, Buffett, and I would become more and more greedy as the masses become more and more fearful.
Following this rule of investing always sets us up to both profit and protect ourselves.
