In his book – The Dhandho Investor, Mohnish Pabrai explains how fear and greed are fundamental to human behavior and significantly influence stock market pricing.
Extreme fear can cause irrational actions, likened to a panic in a crowded theater where everyone rushes for the exits, leading to a market crash. The key is to buy when others are fleeing, provided there is no real danger or the threat is nearly resolved.
Success in the market requires patience and extensive reading to recognize these opportunities when they arise.
Here’s an excerpt from the book:
Fear and greed are very much fundamental to the human psyche. As long as humans drive buying and selling decisions in equity markets, pricing will be affected by these fear and greed attributes.
When extreme fear sets in, there is likely to be irrational behavior. In that situation, the stock market resembles a theater that is filled to capacity. Someone sees some smoke and yells “Fire, Fire!” There is a mad rush for the exits.
In the theater called the stock market, you can only exit if someone else buys your seat—each share has to be held by someone! If there is a mass rush to leave the burning theater, what price do you think these seats would go for?
The trick is to only buy seats in those theaters where there is a mass exodus and you know that there is no real fire, or it’s already well on its way to being put out. Read voraciously and wait patiently, and from time to time these amazing bets will present themselves.
You can find a copy of the book here:
The Dhandho Investor – Mohnish Pabrai
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