Warren Buffett once said that as an investor, it is wise to
be “Fearful when others are greedy and greedy when others are fearful.” This
statement is somewhat of a contrarian view on stock markets and relates
directly to the price of an asset: when others are greedy, prices typically
boil over, and one should be cautious lest they overpay for an asset that
subsequently leads to anaemic returns. When others are fearful, it may present
a good value buying opportunity.
Keep in mind, the price is what you pay and value is what
you get, pay too high a price and returns are decimated. To elaborate on this,
the value of a stock is relative to the amount of earnings it will generate
over the life of its business. In particular, this value is determined by
discounting all future cash flows back to a present value, or an intrinsic
value. Pay too high a price and the return that arises as a stock gravitates
back to its intrinsic value over time will erode. Act greedy when others are...