Greed and Fear

I was just looking over a list of the cities where the highest percentage of homes was "under water," i.e., the mortgage is higher than the house is worth. 
And a light went on in my head.
I used to manage money.  I heard people throw around the words "greed and fear" almost every day.  When markets were expensive, EVERYBODY wanted to buy.  When they crashed, you couldn't give stock away.
So, back to mortgages, more than half of the people in these cities owe more on their houses than they can get from a buyer.

• Bakersfield, CA
• Riverside, CA
• Fort Meyers, FL
• Fairfield, CA
• Orlando, FL
• Reno, NV
• Port St. Lucie, FL
• Phoenix, AZ
• Stockton, CA
• Modesto, CA
• Merced, CA
• Las Vegas, NV

That's over 1.8 million households, with houses worth about what they were sometime between 1998 and 2003.  Some of these people had to buy their homes for a new job, etc.  But most, I imagine, saw housing prices go straight up during that period and bought or refinanced, thinking they could make money when they sold.  Now, unfortunately, the majority of people in these cities are on the "fear" side of "greed and fear."
The return on investment for investors in the stock and real estate market, over the long term, is very similar.  Apparently, so is the motivation to buy.  We know, as investors, we should strive to "buy low and sell high," or as Warren Buffett says, "Be greedy when others are fearful: be fearful when others are greedy."  But that's not what we do.
Back to the stock market, you may have noticed it's going up.  A lot.  Let's take a look at that for a moment.
First of all, it's up about 50% from its low.  It came down 50% from its high.  So, does that mean we're back where we started?  Far from it.
Since we're near Thanksgiving, let's use the example of pie.  If we put a pie on the table, and the kids eat half of it, it's easy to visualize what's left: half a pie.  If we increase that half a pie by 50%, we add a quarter of a pie.  We've got 3/4 of a pie, or 25% less than the full pie that we put on the table.
So, if the market is down 25% from its high, does that mean that it's cheap?
If we look at history, the average price investors pay for every dollar the S&P 500 earns is $15.82.  Right now, you'll pay about $21 for next year's earnings.  At the market low, you'd have paid under $11.  So, it's more expensive than its average price, but that's not surprising, since it's roared back over 50% from last March.  Does that make you feel greedy (I've got to get in before I miss the boat) or fearful (I should have bought when it was down, and now it's probably due for a correction).
The best way to feel, in my opinion is emotionless.  Being rational, rather than greedy or fearful, is the best strategy.  One very good strategy is to review your spending, put some money aside every month and invest it no matter where the market is, making sure, of course that what you invest is long term money.  That means you won't be using it for ten years or so.
This constant investing strategy is called "dollar cost averaging," and will result in you buying sometimes when the market is low, and sometimes when it's high.  Overall, you'll average out the peaks and valleys and invest rationally - for the long term.
Then you can leave greed and fear for the drama queens.