FEAR FACTOR
By Dan Ferris

I don't know if I should tell you this.

I should be afraid that you might use what I'm about to tell you. You'll use it against me in the market.

What I'm about to tell you is the only real edge I possess as an analyst and as an investor.

But I've pledged to serve you, dear reader, and serve you I must, to the utmost of my ability. So it is that I must reveal the greatest single secret of investing as I have learned it.

Before I tell you what the greatest single secret of investing is, though, I want to tell you why I'm going to give it to you. I'm going to tell you this secret because it's hiding in plain sight. I bet going public with it won't hurt me any, because knowing it doesn't change the fact that you still have to do lots of work to take advantage of it.

So here it is, the #1 secret of investing.

The secret is that fear is the dominant emotion in the market at all times.

I've never heard anyone say this, but I know of several famous investors whose actions reflect a clear understanding of it.

When Warren Buffett bought shares of Wells Fargo back in the early 1990s, everyone thought he'd lost his touch. He got a call from a colleague in New York - strictly on the QT - saying that Wells Fargo wasn't going to make it.

Buffett never let the fear get to him. Today, Wells Fargo is the only AAA-rated bank in the country. Buffett has made in the neighborhood of 20% a year on it.

But even Buffett has misquoted the secret. He said once something like, "to make money, you have to be greedy when everyone else is fearful and fearful when everyone else is greedy."

I think Warren Buffett is wrong about that one, and I bet if I called him up and told him, he'd agree with me.

If people were really greedy, they'd wait until stocks were in their darkest hour - and therefore at their lowest prices - to buy them. But most people don't do that.

They wait to buy. Nobody wanted stocks in 1982, the perfect moment to be greedy. There was no reason to be afraid, no reason to wait. You don't wait to buy something that's priced right unless you're afraid. Period. That's why I say that fear is the dominant emotion in the market at all times.

Instead of doing their own work and relying on the conclusions of their own thinking, most investors - including most of Wall Street - let the price action of the entire market, or even of a single stock, pinch hit for their own intellects.

Maybe it's not great insight to say that everyone is afraid at market bottoms. But what about tops? Everyone is greedy at tops, right?

Wrong.

The reason so many people become involved in stocks at market tops is because...everyone else is buying. That's what everyone is waiting for. When you're filled with fear, you wait for some sign that it's safe to buy again. The sign investors choose most often is the actions of others.

Otherwise sensible people, crazy as it sounds, though blessed with a perfectly good brain, often choose to substitute the product of someone else's brain for the product of their own brain. Somehow, if someone else is doing something, it makes it more legitimate than if they thought of it on their own.

Henry Blodgett is a good example of fear personified, and a total lack of confidence in his own mind. Blodgett worked for Merrill Lynch, and got famous in the late 1990s as an Internet analyst. He said Amazon.com would go to $400, and it did (that's a pre-split price).

Recently, I read an article written by Blodgett. Now he says you're best bet is - are you ready for this? - index funds. There's hardly been a worse time to buy the big indexes. But it feels safe to do that, the way it felt to buy Amazon at $400, though I can't speak from experience. Blodgett, it seems, is not capable of thinking for himself. He's so scared of thinking he just can't bring himself to take a position.

Henry Blodgett's heart is filled with the fear.

Here we are, the paragon of animals, and most of us don't get past the behavior of lemmings when it comes to investing.

But investing doesn't work like that, does it? In order to make money, you have to stand on your own. You have to do your own thinking. You have to do your own research. You have to make your own decisions, and handle the consequences every step of the way.

Regards,

Dan Ferris