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Fundamentals trump fear, greed

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Making rational, successful investment decisions often requires a counterintuitive approach. Instead of buying low and selling high, investors driven by fear and greed are instinctively compelled to make the opposite choices. Brian Kilb says in a Money Talk video that one way for investors to overcome their impulses is to focus on fundamentals. Here is a transcript of the video.

Brian: The conflict between what we feel emotionally and what we think rationally hurts investors. And what we want to do is use fundamental data when it comes to stocks – interest rates, earnings and overall price valuations – to overcome the emotions that will tell us to do something contrary to what’s good for us.

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When it comes to buying equities, you want to buy cheap. When it comes to equities, you want to sell when they’re expensive. When you look at what makes stock prices cheap, it’s often an event that creates a great deal of fear. And that fear is what compels people to stay on the sidelines. It’s what compels people not to buy. And to be a successful investor, you want to overcome that fear and be able to buy when stocks are cheap in spite of the fear that’s out there. To become a successful investor, you want to be able to sell those securities that are richly priced, that you’ve made money on – in spite of your greed, in spite of the desire that we have as investors to want to keep those really good things.

Consider what you’re doing when you buy a stock, you’re buying a company and an expectation for future earnings. Then you’re going to discount those future earnings by some rate of interest. So really when you’re buying a stock, you’re buying a stream of earnings discounted by an interest rate. What’s really important to an investor when buying stocks? Interest rates and earnings.

So if you’re paying attention to the interest rate environment, if you’re paying attention to the earnings environment, and you have some sense of valuation in the market place, you can combine those factors to make really good decisions.

If we wait until an event drives stock prices higher or lower, then already the emotion has taken over, and it’s difficult to bring it back to some kind of rational behavior.

Brian Kilb is executive vice president and chief operating officer of Landaas & Company.

Money Talk video by Peter May

(initially posted March 20, 2013)

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