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Fear and greed in one index

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Schalk Louw is a portfolio manager at PSG Wealth.
Schalk Louw is a portfolio manager at PSG Wealth.

Warren Buffett remains one of the most famous investors out there, so it’s no coincidence that his sayings are equally famous. One of my favourite Buffett sayings has to do with two emotions in the investment world: “Two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable ... We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

The genius Albert Einstein said that compound interest is the eighth wonder of the world. “He who understands it, earns it ... he who doesn’t ... pays it.” Now, I would never dare to disagree with a man of his calibre, but I would like to add that if compound interest is the eighth wonder of the world, then the “herd effect” must be the ninth. The herd effect is without a doubt one of the strongest forces out there, not only when it comes to consumer goods, but even stronger in the investment realm.

I’ve been following this index for quite some time and I have found that along with the fact that many short-term indicators use this index, it gives us a good indication of the emotional state of US markets. I did some investigating into the methodology of this index and decided to apply it to the South African investment market as far as I possibly could. The results were quite surprising.

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