Learn why contrarian indicators move opposite to the crowd.
British economist, John Maynard Keynes identified features of financial markets that subject prices to herd-like behavior.
“The herd-like nature and influence of animal spirits in financial exchanges, and its potential to shift independently of changes in objective facts, is, according to Keynes, a primary, ineradicable source of economic instability.”
Groups move together in crowds and it impacts markets.
Media is calling it “animal spirits” – Bloomberg, Barron’s, financial websites.
The cover of Barron’s says Dow 20,000, pre-conditioning you to think it’s going there.
Look inside Barron’s for some bullish indications that are saying the public is 63% bullish right now.
Here are the reasons you need to be a contrarian investor:
1. When a good investment becomes obvious, it’s very late in the game. This means when you’re judging solely by price or return and something has gone up 100% or is crossing 20,000, you are one of the last ones in! I often tell the story of the tech fund that was up 100% in 1999 and took in over $1 billion in new assets soon after. The next 3 years it was down over 70%! I you bought at the top, you lost 70%.
2. When bullish consensus is over 60%, everyone whose going to invest already has. Like Joseph Kennedy, JFK’s father said when a shoeshine boy gave him a stock tip in 1929, everyone is already in the market if the shoeshine boy is giving stock tips.
3. Most good investments fly quietly under the radar for a long time before they are recognized. They tend to be out of favor or unnoticed by many before they become obvious and the crowd jumps in. Everyone is still talking about oil, while hedge funds have been investing in green energy for 10 years!
4. Buy low and sell high. How can you buy low if you’re buying it at the top? If you want to buy low, shouldn’t you be buying the dips?
5. Keep from getting emotional – that’s back to animal spirits but I’m talking about FOMA – fear of missing out. Sometimes people fear they are going to miss out on the Dow crossing 20,000 and it’s going to go straight to 50,000. That’s irrational! Catch my last podcast about why that won’t happen.
Truthfully, the market looks very over extended here. We are due for a pullback. Even when markets start to run away from you, it’s usually overdue for a pullback and gets a more pronounced one. A famous investor said, the best time to buy stock is when blood is running in the streets. Remember you’re buying businesses, so think of when businesses earnings are best, when news is best and what quarter it might be worst. Just like you can buy houses in December for the best price and least competition, you can also buy companies that way. Here’s the thing, if you’re buying an ETF for the long-term, it doesn’t matter so much when you buy because you’re going to hold it for 10 or 20 years. The odds are in your favor to buy and hold than to try to jump in and out or be a day trader, so try to dollar cost average in – buy at regular intervals – and hold for the long-term.