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

That is classic Buffett. Vintage, classic, timeless Buffett. A quote for all investors to truly live by.

Unfortunately, the simplicity of the quote belies the oftentimes excruciating difficulty that comes with actually following what it says. The reason is simple: The stock market is, well, a market and so there are always buyers and sellers, bulls and bears. So if you look hard enough, you can always find other investors that appear to be either greedy or fearful.

For your consideration
I recently took on fellow Fool Anders Bylund in a Foolish battle to the death over Netflix (Nasdaq: NFLX). On one of my bear-side articles, a reader paraphrased Buffett's famous quote, suggesting that it was time to get greedy with Netflix because I was painting a fearful picture.

To be sure, I am fearful about Netflix's stock. Though the folks at Motley Fool Stock Advisor don't agree with me on this one (Netflix is a longtime rec), the stock's current valuation is the kind of thing that could give me nightmares as a shareholder. That's just what I think, though. Is the entire market fearful about Netflix's stock? That's more important because it's only then that Buffett's quip really applies.

I'd argue that the market is anything but fearful about Netflix's stock -- the stock has more than doubled over the past year and currently trades at more than 50 times 2011 earnings estimates. In fact, it seems to me that, if anything, we should be fearful over the apparent greed that's driving Netflix's stock.

Tunnel vision
As humans, we are unfortunately preprogrammed in such a way that we can fall victim to quite a number of cognitive biases. As investors, unless we are aware of these biases and keep close tabs on where they might crop up, we may find them pushing us into terrible investing decisions.

Consider the hostile media effect. In a study at Stanford University, a group of pro-Palestinian and pro-Israeli students were each shown a collection of identical news clips about events during the Lebanese Civil War. Researchers found that both sides came away with the impression that the news clips were biased against their side and were saying favorable things about the opposition.

Personally, I see this effect crop up every football season when my dad and I watch Penn State football games. No matter who's commentating or where the game is taking place, we inevitably spend half of the game griping about how the commentators obviously hate Penn State.

While the latter example may be a bit silly, the hostile media effect is anything but, if it creeps into our investing. Even a small dose of this and suddenly we start to view all of the coverage about a particular stock that we own as overly bearish. And what happens next?

"Obviously," we wisely conclude, "the market is fearful of this stock, and so following the good Mr. Buffett's advice, it's time for me to get greedy!"

If the "fear" permeating the market ends up being a figment of your imagination, you can easily see how your investment may not end well.

So when are markets actually fearful?
Call me a simpleton, but I prefer to take a very straight-forward approach here. In short, if a stock's price is falling and/or it has a low valuation, the market is fearful. End of story.

This doesn't mean that every stock whose price is falling and that carries a low price-to-earnings multiple is worth backing up the truck for. Many stocks that exhibit those factors are getting throttled for good reason. But that's not always the case. Or, at least, in some cases the market's fear has significantly overshot the situation and left the stock cheap.

Why am I so convinced that Buffett would back me up on this view of his quote? The last time (to my knowledge) that he used it in a significant way was in his October 2008 editorial in The New York Times. He wrote:

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.

And we could most certainly see that fear demonstrated through my two simple checks. Between Oct. 16, 2007, and Oct. 16, 2008 (the date of the editorial), the S&P 500 lost 38%. Meanwhile, Robert Shiller's long-term S&P valuation multiple had fallen from nearly 28 in May of 2007 to 16.4 in October of 2008.

Where's the fear today?
It's a bit more challenging to find fear in the market today as compared to October 2008. The S&P 500 has nearly doubled since its early 2009 low and the Shiller valuation measure that I mentioned above has climbed back to 23.4. Many stocks have vastly outperformed the S&P and particular areas of the market -- for instance small caps broadly -- are looking a bit greedy to me.

However, if you look closely enough it's definitely possible to find stocks showing signs of investor fear.


Year-Over-Year Price Change

Forward Price-to-Earnings Multiple

Western Digital (NYSE: WDC) (6.2%) 10.9
Teva Pharmaceutical Industries (Nasdaq: TEVA) (19.9%) 9.1
SUPERVALU (NYSE: SVU) (29.2%) 8.7
Best Buy (NYSE: BBY) (29.7%) 9.1
Cisco (Nasdaq: CSCO) (34.2%) 10.6

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

To be clear, the information above is not enough to make an investment. While I like to hunt for stocks among those that Mr. Market is currently afraid of, as I noted above, it's important to figure out whether the fear has actually created a good buying opportunity.

That said, looking at the list above, I think we may have a handful of stocks that have been victims of a fearful overreaction. When it comes to Best Buy, I'm with my fellow Fool Anand Chokkavelu -- I'm not particularly bullish on its long-term prospects, but I do think the beating it's taken recently has ignored the current (profitable) realities of the company. I think Western Digital falls in a similar class. Though it also faces significant long-term challenges, I think it could be a good performer for the shorter run.

As for the other three, I think there could be longer-term opportunity available. There are definitely substantive concerns for all of them -- Cisco's growth and competitive position, SUPERVALU's balance sheet, Teva's proprietary drugs -- but I think investors have overshot those concerns and left these stocks with attractive valuations.

If you want to take a closer look at the group above, a good start is adding them to your Foolish watchlist. You can add any of the stocks in this article by clicking the "+" next to it, or you can click here to get started.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.