These Are Fearful Times – But Here’s Why You Shouldn’t Be Afraid of Investing

If you have been reading the business news for the past few months, it is indeed a frightening world out there. From the slowdown in China, the huge debt problem in Japan, to the crisis in Ukraine, fear is constantly in the air.

What is interesting though is how we can use  the ‘amount’ of fear in the market as an indicator for our investing decision-making process.

Be greedy when others are fearful

There’s a famous quote by an even more famous investor, Warren Buffett, that goes “Be fearful when others are greedy and be greedy when others are fearful”. It teaches us a very simple truth: There is money to be made during crises and those who can control their emotions during times of panic will have the ability to take advantage of the situation.

Markets are highly efficient, but not perfect

In the efficient market hypothesis, markets are stated to be perfectly efficient and it is impossible for an investor to out-perform the market through either technical analysis (the study of past price movements to predict future price movements) or fundamental analysis (the study of a share’s underlying business fundamentals to determine its attractiveness as an investment). This theory is highly controversial and investors have been arguing about it for decades.

My personal Foolish take on this issue is that the efficient market hypothesis has made two assumptions that are highly improbable in real life: 1) That all market participants have perfect information about the market and; 2) that investors are rational.

It seems to me that it is almost impossible for anyone to have perfect information about the market as there are always issues that are beyond our control and we can only make use of whatever information we have at hand to make the best informed-decision we can. In addition, if investors are all rational, there will be no fear or greed in the vocabulary of the investment world. Investors, who are only human, are creatures of emotions and the presence of overwhelming fear is a great indication of knowing when the right time to invest is.

For instance, the Straits Times Index (SGX: STI) dropped to around 1,500 points at its lowest during the Global Financial Crisis of 2007-2009, which is more than 50% below its current level of around 3,100. The crisis was a time of great fear and markets around the world were in fear-induced declines. But those who were able to see beyond the shroud of fear in those tumultuous times could have profited greatly, as seen in the Straits Times Index’s near-doubling in its rebound.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.