The Annoying Advice That You'd Better Follow

"Be fearful when others are greedy and greedy when others are fearful."
-- Warren Buffett

Oh for the love of a broken record! I would rather be strapped down and forced to watch Titanic on a loop for a week straight (sorry James Cameron, I wasn't a fan) than have to hear that darned investing proverb one more time.

But you know what's even more frustrating than the endless repetition of that line? The fact that it's 100% true.

Think about it: Back in 2000 every average Joe with two nickels to rub together was suddenly a stock trading genius. Meanwhile, stocks like Microsoft (Nasdaq: MSFT  ) and Cisco (Nasdaq: CSCO  ) were trading at price-to-earnings ratios of 78 and 182, respectively, and the entire market was getting ready to plummet.

On the other hand, at the beginning of March of last year, many individual investors were feeling utterly defeated and looking at all of Wall Street as if it were one giant Madoff scheme. As we know now, the market was getting ready to make a huge rebound and individual stocks like Apple (Nasdaq: AAPL  ) and JPMorgan Chase were on the cusp of triple-digit gains.

How are investors feeling today?
Certainly investors aren't anywhere near as bearish as they were last year, but there's good reason to believe that many investors are still very unsure about stocks after the recent meltdown.

In fact, there have been a number of articles hitting the presses lately that have zeroed in on individual investors who claim to be almost completely washing their hands of the market. In a recent Wall Street Journal article, author Jason Zweig presents a typical case:

Having been burned twice in 10 years," says Mr. Eberlin, he now has about 80% of his family's assets "protected from the market" in certificates of deposit and fixed annuities. "I don't have trust in Wall Street to help the small investor in any way, shape or form.

A USA TODAY piece in the same vein describes how many individual investors have unknowingly subscribed to a "buy-and-fold" strategy similar to a case cited in the article:

Near the stock market low last spring, with his losses nearing $200,000, Martin Blank, 67, a Florida retiree with four decades of investing experience, sold most of his stocks.

He liquidated 75% of his stock funds. He hasn't put that cash back in the market. And doesn't plan to.

Of course these are anecdotal reports, and it'd probably be easy enough to cherry-pick a few extreme cases to tell a good story. But data from the American Association of Individual Investors seems to corroborate the idea that investors are at least handling the market with a lot of caution. Check out the results from the AAII's sentiment survey over the past decade:

Time Frame

Percentage of Investors Bearish on Stocks

2000

24.2%

2001

28.5%

2002

28.4%

2003

27.2%

2004

25.1%

2005

30.3%

2006

36.6%

2007

38.3%

2008

45.2%

2009

41.9%

2/4/2010

43.1%

Source: American Association of Individual Investors.
All yearly data based on averages for that period.

I don't know about you, but I smell fear in the air.

Time to get greedy
Anyone that's even had half an eye on the market knows that many of the bargains that were available a year ago have dried up thanks to the market's big rally. But due to the pessimism that's still hanging in the air, there are plenty of large, well-known, high-quality companies out there that are selling at very reasonable prices.

Here are a few I was able to find with a simple stock screen:

Company

Return on equity

Price-to-Earnings Ratio

P/E-to-Growth Ratio

America Movil (NYSE: AMX  )

43.9%

13.3

0.8

UnitedHealth (NYSE: UNH  )

17.2%

10.0

1.0

eBay (Nasdaq: EBAY  )

19.2%

12.4

0.8

Transocean (NYSE: RIG  )

18.9%

8.0

0.3

Fluor

24.9%

10.8

0.9

Source: Capital IQ, a division of Standard & Poor's.

Of course while these stocks may deliver solid returns, getting greedy with smaller stocks could be even more profitable. Because major hedge funds and mutual funds have huge amounts of capital to put to work, they often ignore small-cap stocks because they can't invest a meaningful amount of money in them. That can often result in great opportunities from lesser-known stocks.

At the Motley Fool Hidden Gems newsletter, the name of the game is finding these unloved little guys. In the most recent newsletter, the investing team dug up a small, but mighty, company delivering a product that nobody can live without, and a tech up-and-comer that they called "the Elmer's glue of the software world." To find out what these mystery stocks are, you can take Hidden Gems for a free 30-day trial.

But if you leave this page with nothing else, just remember, as much as Buffett's over-used advice may make you want to upchuck, if you're greedy when others are greedy and fearful when others are fearful, you probably won't be on speaking terms with Mr. Market for very long.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. Microsoft and UnitedHealth Group are Motley Fool Inside Value selections. Apple, eBay, and UnitedHealth Group are Motley Fool Stock Advisor recommendations. America Movil is a Motley Fool Global Gains selection. Motley Fool Options has recommended a bull call spread position on eBay. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of UnitedHealth Group. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants ...


Read/Post Comments (11) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 19, 2010, at 7:57 PM, NotJesseL wrote:

    Wall St and big business is a bit of a "Bernie Madoff" scheme. How else do you account for the shameless pursuit of riches at someone elses expense, e.g. when Goldman Sachs was shorting the same securities it was recommending as safe to institutional investors. Or, take another example, about 17 years ago, the CEO of Waste Management took home pay of about 20 million at a time when the entire profit for the year of Waste Management was 40 million. (And he had a very small share of the stock, under 1% as I recall).

    However, I totally agree with the article, in that there are some cheap stocks out there with low P.E.'s that will definitely benefit as the economy gets better. And putting your money in CD's is not the answer, careful diversification will be far more beneficial. And, either get someone who doesn't have a commission to earn to help you monitor it, or monitor it yourself. A 65 year old will live a bunch of years more on average, so it is not smart to put it all in investments that don't grow at all.

    Investing can be like gardening - there will be some disappointments, but you don't stop just because one type of plant didn't turn out right. You don't just grow one type of plant. And you basically have to do some work or hire someone to do it for you.

  • Report this Comment On February 20, 2010, at 12:50 AM, GrubbyDollars wrote:

    JP Morgan states that many of the mortgage officers that they are hiring will be stationed and loan centers all across the United States. What baffles me is their logic for the hiring trend. They are reported to have claimed that they want to be able to most dutifully service and serve home loan seekers when the real estate market does turn around. That is not an exact quote but you get the idea.

    My question is what do they know that we are not hearing from the media? They are hiring when it seems every other business is laying people off? That does not make any sense to me, unless they know something not many other people do.

    I will stop beating around the bush and just make my point. JP Morgan and Goldman Sachs have both been waiting to start lending again to maximize their own profits at the expense of the American consumer and home buyers and sellers expense. Given that these kinds of illogical moves are typically seen when the CEO of a company dumps his stock the day before the company goes public with some bad report, we may be seeing the end of a suppressed real estate market very soon!

    ---------------------------

    www.topinvestingtips.com

  • Report this Comment On February 20, 2010, at 12:50 AM, GrubbyDollars wrote:

    JP Morgan states that many of the mortgage officers that they are hiring will be stationed and loan centers all across the United States. What baffles me is their logic for the hiring trend. They are reported to have claimed that they want to be able to most dutifully service and serve home loan seekers when the real estate market does turn around. That is not an exact quote but you get the idea.

    My question is what do they know that we are not hearing from the media? They are hiring when it seems every other business is laying people off? That does not make any sense to me, unless they know something not many other people do.

    I will stop beating around the bush and just make my point. JP Morgan and Goldman Sachs have both been waiting to start lending again to maximize their own profits at the expense of the American consumer and home buyers and sellers expense. Given that these kinds of illogical moves are typically seen when the CEO of a company dumps his stock the day before the company goes public with some bad report, we may be seeing the end of a suppressed real estate market very soon!

    ---------------------------

    www.topinvestingtips.com

  • Report this Comment On February 20, 2010, at 4:11 AM, jjhoekstra wrote:

    For me the most important aspect is the psychological side of investing. Until you have actually experienced it, it is hard to imagine how difficult it is to buy shares with your own money when the market is going down. I guess that less than 1% of the normal population is able to learn to handle these kind of psychological conflicts. Wall street knows this and it will always (try to find) ways to profit from the 99% who will never learn.

  • Report this Comment On February 20, 2010, at 11:27 AM, jomueller1 wrote:

    My favorite game is Monopoly. My father hated it with a passion as he despised the religion of money. To bad he did not understand the psychology of Wall Street and the ways the Wall Street guys cheat the working people out of their money.

    But if you play Monopoly and think, think, think about the moves being made and the thoughts behind those moves and the way the game can be played you learn a lot. Just imagine it was real money! At the end you understand the mindset of the "haves" who don't give a %^&* to bankrupt you as long as their portfolio grows. The fact that "live and let live" creates a greater communal wealth does not enter the mind of many.

    With that in mind I stopped paying attention to analysts because they are snake oil sellers. The only thing that counts for me is money flow. I do not even follow paid advisers any more because with them I lost double. I wonder if they promote a deal and they sit on the other end taking advantage of my trades.

    So I get information from the "fools" and put that into context and study the charts and use some common sense and try to replace my greed with reasoning. Since then I am doing OK in the market and I can sleep well.

  • Report this Comment On February 20, 2010, at 12:03 PM, catoismymotor wrote:

    "Buy when there is blood in the streets." is my personal favorite. Panic selling results in some companies being sold at an irrationally low price.

    One of my dad's favorite movies is Grand Prix. I remember watching it a kid and this these pieces of dialogue:

    Jean-Pierre Sarti: Before you leave I want to tell you something. Not about the others, but about myself. I used to go to pieces. I'd see an accident like that and be so weak inside that I wanted to quit - stop the car and walk away. I could hardly make myself go past it. But I'm older now. When I see something really horrible, I put my foot down. Hard! Because I know that everyone else is lifting his.

    Louise Frederickson: What a terrible way to win.

    Jean-Pierre Sarti: No, there is no terrible way to win. There is only winning.

  • Report this Comment On February 21, 2010, at 12:50 PM, Saintramus wrote:

    pretty much ancillary to the actual topic under discussion, but regarding the first paragraph, I hated [probably too strong a word] Titanic too

  • Report this Comment On February 21, 2010, at 1:44 PM, PositiveMojo wrote:

    Hey dude - right on! I smell fear in the air and see it on the charts. You gotta disconnect emotion from technical analysis and "common sense". This past week 2/16-2/20 is showing signs of break thru.

    Open the gates and let the bulls run, Fool.

  • Report this Comment On February 21, 2010, at 1:56 PM, AvianFlu wrote:

    As a contrarian I must report that I saw Titanic seven times in the theatre.

  • Report this Comment On March 02, 2010, at 4:32 AM, Usnzth wrote:

    Dear AvianFlu,

    Did you get a good return?

  • Report this Comment On December 08, 2010, at 8:56 PM, Mstinterestinman wrote:

    Metlife is dirt cheap right now less than ten times forward earnings.

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