Common wisdom dictates that the market is pulled up and down by greed and fear. When the market is having a run, traders and investors jump on board, greedy to cash in on the bull market. Similarly, when the market is turning down, they sell out in fear of losing their money. But what drives fear and greed into people's hearts and minds in the first place? The answer, in part, has to be predictions in the media about the economic outlook. And in that sense, I contend that all the forecasts you'll read in investment magazines, on websites and so on are a self-fulfilling prophecy. The reason we will have an economic slowdown next year is twofold: first, people who are directly affected by higher interest rates, higher oil prices, drought, the slowing US housing market, and the multitude of other factors that will reduce their spending on goods and services. Second, people who are not affected directly by these events, but read about them in the newspapers and start to worry.

Now, I'm certainly not suggesting that the economic issues above are trivial or imaginary. On the contrary, there seems to be a weight of evidence that suggests a number of factors will conspire to make people spend less. Further, it's healthy for there to be an ebb and flow in consumer spending and business investment. Not a boom-and-bust cycle, but a business cycle. It's these that keep us invigorated and agile when tough times do strike.

What I'm talking about is simply the fact that there will be people who will read in the newspapers that a slowdown is imminent, and even though they are not directly affected by the various factors I have mentioned, they will curb their spending out of fear that they will be affected. Ah, there's the operative word. And once this fear of a decline impacts their spending, the impact will result quite naturally.

This is certainly not a new theory, nor is it my theory, nor is it foolproof. Afterall, there is no practical way to test how much people would have spent if they had not read the newspapers predicting doom. But it's worth checking our own behaviour to see if we are changing our spending patterns, similarly to whether we are letting the terrorist threat affect our daily lives. Afterall, that is also about perceived fears, even though the chances of you being caught in a terror attack are probably just as high as you being impacted directly by the slowdown in the US housing market.

For contrarian investors, who are guided by fundamentals over a five year period and don't care much for the swings over a few days, weeks or even months, these times of fear provide real opportunity. There is no greater word of joy than "oversold". For technical analysts, there is no luckier number than 30, because when the Relative Strength Indicator dips below this number on any given stock it is one step closer to becoming interesting. So many good companies are trading at book and earnings multiples that are firmly out of reach of value investors. For us, a slowdown - perceived or real - would mean that stocks are 'on special' again.

In essence, Warren Buffet had it right when he said: 'when everyone's buying, I'm scared. When everyone's scared, I'm buying'.

'Go placidly amid the noise and haste…'


Mark Laudi