A contrarian investor enters the market when others are feeling negative about it. The contrarian believes the value of the market or stock is below its intrinsic value and thus represents an opportunity.
The premise of contrarian investing is that if you follow the crowd you will probably lose money because the crowd usually gets it wrong. Unfortunately, this is a common trait and most of us are guilty of this human failing.
Extraordinary Popular Delusions and the Madness of Crowds is an early study of crowd psychology by Scottish journalist Charles Mackay, first published in 1841 under the title Memoirs of Extraordinary Popular Delusions. In this book, he explained a number of economic bubbles when most people followed the crowd until the bubble burst and fortunes were lost.
The problem is that once everyone around you starts making money easily you find it hard to resist and you join the crowd. The trouble is that eventually the crowd mania ends and prices fall very sharply then everyone sells in a panic. The South Sea Bubble, Witch Mania, Alchemy, the Crusades, Fortune-telling, Haunted Houses, and even ‘Tulipomania’ are only some of the subjects covered in this book.
The book is so good it should be compulsory reading for all school children.
In fairly recent history we have had the dotcom boom and bust which occurred in the later nineties to early noughties. Arguably we are experiencing a boom and bust period currently with crypto currency. At the time of writing this blog Bitcoin has fallen 14.8% and Ethereum 22.8% (source Kraken) in the last 24 hours alone. Since October last year when Bitcoin reached its all-time high of $66,025 it has fallen in value by 75% (source Kraken). Ethereum has plummeted by virtually the same amount over the same period of time.
As Mark Twain once said “History Doesn’t Repeat Itself, but It Often Rhymes.”
Share prices are volatile but over the long term, periods of ten years or more, they produce the greatest investment returns of all asset classes. There is overwhelming research which proves this to be the case.
So it is best not to follow the crowd even though it is challenging to do so. The last thing you want to do is keep repeating the same mistakes investors have been making for centuries.
“Insanity is doing the same thing over and over and expecting different results.” That witticism—I’ll call it “Einstein Insanity”—is usually attributed to Albert Einstein.
So be bold, be different and don’t follow the crowd. Before you invest, think it through for yourself. Look for signs of why you should buy particular shares and why the timing is right. Here are some signs to look out for;
- Investors are extremely pessimistic and nervous
- There is a lot of panic selling
- Prices keep falling
- There is endless bad news and hysteria
- Certain excellent companies keep increasing their turnover and profits yet their share prices keep falling
- Economic news is bad
- There appears to be no end in sight
Does this sound uncannily like the times we are living through right now? You bet it is.
Have share prices reached rock bottom? Maybe they have, maybe they haven’t. One thing for sure is that share prices are much cheaper than they were a year ago. Could share prices go lower in the short term? Yes, they could. Equally share prices could start rising soon. Nobody knows for sure.
At times like this, I remind myself of Warren Buffett’s famous quote “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.” The Sage of Omaha is rarely wrong.
On balance, I think now is a really good time to invest because share prices are low. When you look back in ten years’ time you are likely to say that this was a really good time to invest though it may not turn out to be the very best time if markets do fall further before they start to rise again. You know it makes sense.*
*Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
