How to Tap Fear and Greed for Successful Stock Market Investing

By Sasha Cekerevac

Which stock is a great long-term investing opportunity? That’s one question I’m always asked. Obviously, I can’t answer that question for everyone, as each person has a completely different financial situation to take into account. However, there is a common occurrence in the stock market that, with the right strategy, every investor can take advantage of for a profitable long-term investing opportunity.

What I’m talking about are swings in investor sentiment. These swings from optimism to pessimism in investor sentiment can be beneficial for those interested in long-term investing. While it’s difficult to see one’s stock or portfolio decrease in value, that shift in investor sentiment creates a buying opportunity for the long-term investing horizon.

But going back to the original question, I would say that instead of always looking for the next “hot” stock, focus on firms that you know really well and look for shifts in investor sentiment that could offer a good entry point.

By having a watchlist of companies you’re interested in for long-term investing and waiting for periods of panic when investor sentiment is dropping rapidly, you can begin accumulating and effectively buying pieces of the company on sale.

Fear pushes investor sentiment far below fair market value. Conversely, greed pushes investor sentiment far beyond market value, to the upside. Essentially, you want to be buying when others are selling, and selling when others are buying.

Chart courtesy of www.StockCharts.com

A recent example of this type of opportunity might be lululemon athletica inc. LULU. As some of you may or may not know, earlier this year, Lululemon suffered a significant drop in investor sentiment when news broke that the company had produced and sold yoga pants that were see-through. The publicity was bad, and the firm had to adjust its manufacturing process.

When news hit that the pants were less than high-quality, the level of fear among investors grew massively; this led to a huge drop in the stock price. At that point, investors should have asked several questions, including: is the problem short-term or long-term? And does this change your viewpoint regarding long-term investing in the company?

Following these questions, if you are still bullish and interested in long-term investing in the company, and if you believe that the problem is only short-term in nature, then this drop in investor sentiment is extremely positive, as it allows you to buy shares at a significant discount to recent history.

Now, Lulu lemon, in particular, is extremely prone to investor sentiment swings, as seen in the chart above, which opens the door for multiple attractive entry points if one was interested in long-term investing in this company.

I am not recommending Lulu lemon, but merely pointing out that this company offers an example of how to develop a strategy. Instead of constantly trying to find the next “hot” stock, get to really know the day-to-day business operations of the company you’re interested in. Once you truly know the fundamentals, you can use investor sentiment shifts to your advantage in building a core long-term investing position.

The key is to watch for fear and greed. Use the fear in the market to your advantage to buy; when the price of a stock, commodity, or any other assets rises far above its fair market value, use the greed exhibited by other investors to take profits.

For long-term investing strategies, fear and greed in investor sentiment are your friends—just don’t let yourself get caught up in the emotions over the short term.

This article How to Tap Fear and Greed for Successful Stock Market Investing was originally published at Investment Contrarians