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Fear is Your Friend

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“Be afraid when everyone invests; but invest when everyone is afraid”

In a recent article we discussed how fear keeps you from being able to take the necessary steps to being successful. We must look beyond our basic day to day fear in order to be successful, but this shouldn’t keep up from playing off of other people’s fear which have yet to be overcome. As we discussed fear makes people act in predictable ways, which is what the news anticipates, as it makes its money this way. So you can also predict people’s reactions and drive some major market wins for your business or finances…

An easy example of real life fear is the current situation in Europe with Greece. The world is watching the news and panicking that the end of the world is coming to an end with the fall of the Euro in 2011. This prediction came as mass panic emerged from the news indicating that Greece would create the fall of the Euro, and make it a very bad currency to own. As this tragic and very timely news came, the world panic begun and people started pulling out of the Euro, causing it to lose value. Who is really to blame for the drop in the Euro’s price? Is it really Greece? Or is it people’s reaction to the news of events in Greece?

Now that everyone is afraid to invest in the Euro as a currency, the price will be dropping and therefore will create an opportunity for those of us smart enough to see the big picture. The big picture is that the EU (European Union) cannot allow the Euro to fail, even if the US must get involved. Therefore the opportunity is now risk limited and makes good sense. This opportunity seems like a death trap if we listen to people as they are in panic mode, but from an investor’s standpoint it’s a strong opportunity.

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Paying attention to other’s fear gives you a unique opportunity to act when they are frozen and take advantage of what others wont or are afraid to. A few years back, I invested myself in real estate, this was in 1999 if I recall correctly; many had said it was foolish as there was no market for growth around the area I was investing in. As expected, they were wrong. Following that event I decided to liquidate my main inventory of homes in 2004-2005, where once again all were opposed as they said, its too early and I would lose money. Once again, they were wrong as the market crashed in late 2005. I followed major investments in banking stocks in 2009, where once again I was told that I was wrong, as the market was too fragile and that caution must be taken. 2010 has brought me over 250% growth across the board, and once again they were wrong…

Who are they? They are the people around you that consider themselves experts simply cause they watch the news or are conservative investors that are three times your age and can’t afford to lose. They are not you. When your friends call you and tell you to invest, be cautious and when they tell you to be careful, do more research and move ahead when appropriate, but remember that at the end their fear should never be your loss, or their loss will become your fear and come true.