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Fear and Greed


By J. Royden Ward, Analyst and Editor of Cabot Benjamin Graham Value Letter
From the August Cabot Benjamin Graham Value Letter 8/5/10

While the economic troubles of the U.S. and numerous other countries continue to make headlines, devotees of Benjamin Graham value investing soldier on, confident that our system of investing in individual undervalued companies will reward over time. And it will always be so, because human nature never changes

Investors as a crowd naturally fluctuate between the emotional extremes of fear, which prevails at market bottoms, and greed, which is dominant at market tops. If you join the crowd, you end up buying at tops and selling at bottoms, which is clearly not a way to make money. Contrarily, if you can do the exact opposite of the crowd, and buy when all are fearful, then sell when all are greedy, you will do very well.

Our approach takes advantage of the fear and greed cycles that move individual stocks. As explained in the quote by Benjamin Graham below, it is a sound system, attractive for its logic, simplicity and excellent record. But we think Mr. Graham was guilty of overstating the system’s simplicity. Even with the help of computers, the labor of accumulating the necessary data on the universe of eligible stocks is a job that takes substantial time, expertise and devotion.

In today’s issue, you’ll find all the regular features, as well as a Special Feature on Undervalued Companies With Accelerating Earnings. Thanks to this feature, this is one of our two issues per year that recommend “popular” stocks, which can be called undervalued only because their growth prospects are so good.

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