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A key Warren Buffett lesson for 2022

Warren Buffett at a Berkshire Hathaway AGM

The past several years have been volatile in the stock market. No one knows what will happen in the coming 12 months. But I think the investing wisdom of Warren Buffett will continue to be helpful to me as an investor.

There is one Warren Buffett investing mindset I will certainly be bearing in mind in 2022.

Fear and greed

On different occasions throughout his long career, Buffett has used the same phrase. He has suggested that as an investor, he aspires to be “fearful when others are greedy and greedy when others are fearful”.

That sounds a bit like what is sometimes called contrarian investing. That involves doing the opposite of what a lot of people are doing. But Buffett’s approach here is more nuanced than simply being a contrarian.

It involves looking at the emotional drivers of other market participants, not just their actions. Warren Buffett is focussed here on very specific emotions. I think his logic could help me in 2022. If I feel other market participants are too greedy, it could be time for me to consider whether I want to keep investing in the market or wait for a possible correction. Similarly, if investors are fearful — like we saw in March 2020 — it could present me with a buying opportunity for my portfolio.

Spotting the mood

But how can I tell whether others are being fearful or greedy?

Last year, briefly, there was a clear sense of fear. Markets plunged, many companies stopped paying dividends, the financial outlook was unclear, and businesses warned about bad times ahead. Since then, I don’t think we’ve seen the same level of fear resurface.

I do think there have been growing signs of greed in 2021, though. Share flotations which soon flop, like THG and Deliveroo, can be a sign that the flotation underwriters and business owners have been greedy in setting a price that is too high. The rise of meme stocks also suggests that some stock market participants have been propelled by short-term greed rather than the considered analysis I associate with long-term investors.

On the other hand, there continue to be signs of fear in some corners of the market at least. Consider aviation as an example. Shares in both easyjet and British Airways owner IAG have suffered in recent months as concerns have resurfaced about future demand for air travel.

Overall, though, I think that as 2021 draws to a close, there is a considerable amount of greed in the market.

Applying the Warren Buffett approach

That is why, in 2022, I will be looking out for more signs of greed. If they arrive I will be more fearful. So in practical terms, I will be more wary of possible valuations. I will focus on evaluating companies rationally, without getting swept up in market euphoria, though I think, in any case, that is the right approach to take at all times.

Then, if the mood suddenly switches back to fear, I will be greedy in scooping up battered down shares for my portfolio.

The post A key Warren Buffett lesson for 2022 appeared first on The Motley Fool UK.

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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Deliveroo Holdings Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.