Fear, Greed, the Stock Market, and You
Where can you find sound, fundamentally-strong, small-company stocks that investors might be avoiding due to irrational fear?
CNN’s Fear & Greed Index is an intriguing attempt at representing how emotion drives the stock market. The tool considers indicators related to price strength and momentum, market volatility, and investors’ demands for safety, then calculates a rating between 0 and 100. Values close to 100 represent "extreme greed" while those nearer 0 represent "extreme fear." In the last week of March, the index was in neutral territory, on an upswing from fear earlier in the year. (You can find the index in the Money section of the CNN.com website.)
Of course, taking the pulse of the entire market does not represent the experience of every security that trades on it, and interpreting investor behavior on a simple axis from fearful to greedy might not tell the entire story. But this can be a useful heuristic to explain how well-run businesses are shunned by investors, or how shoddy enterprises receive adulation. Fear and greed are both powerful motivators.
In reviewing our coverage list in this issue, there are a greater number of mismatches between our perception of a company’s prospects and the market’s valuation of its stock. Investors seem to be fearful of a number of stocks that we hold in esteem, and excessively greedy about a handful, as well. This presents a number of additional opportunities to consider, based on projected total return, in addition to our two focus stocks.
As Warren Buffett likes to say, “Be fearful when others are greedy, and greedy when others are fearful.” Smart investors know that relying on fundamentals and common sense can support success in the market over the long-term.
The first of our recommendations in the April 2022 issue of the SmallCap Informer stock newsletter is a small regional bank selling at an attractive price, and the second is a former high-flying medical device maker that has settled to an attractive valuation. Subscribe today to the SmallCap Informer for expert guidance on the small-cap allocation in your personal stock portfolio.
- DOUGLAS GERLACH
Reprinted from the April 2022 issue of the SmallCap Informer.
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