Buy, buy baby
The markets rallied on Friday, but nothing came of it. The S&P 500 was a bit flaccid, to say the least, and it is in many ways a strong reflection of sentiment across the board that is tepid and hesitant. Remember that traditionally September and October are not a good month for stocks and you have good reason to draw just an inch closer to that panic button right away. Volumes have been light and individual investors are not picking up stocks the way they used to, and that can be seen quite clearly in the mutual fund market. Here’s a simple fact; bond funds have recently attracted $25 billion while equities have seen $12 billion fly out of their hands. That is an alarming figure.
This is a clear message from investors that they don’t believe the recovery is on track and that they want to keep their money where they can keep an eye on it. Most of these individual investors have been burnt once and don’t want to get their hands burnt a second time over. It’s not just malaise at an individual level either; analysts are dubbing an increasing number of stocks as “hold” worthy and nothing more. Buy recommendations are few and far between. All of this leads us to the idea of contrarian investing. If you’re insightful enough, you already know what we’re on about. Investors tend to be wrong at the extreme end of sentiments. If a market is bearish, buy like you’ve got giants bags of money. If a market is bullish and thinks the sky is the limit, say your goodbyes and head for the nearest way out.
This is not some new-fangled concept or school of thought. It is older than you think and one even the legendary Warren Buffett follows from time to time, best personified by his advice to “be fearful when others are greedy and to be greedy only when others are fearful.” Think of the dotcom bubble and how it went belly up faster than it made profits for everyone. Investors put money into an imaginary piñata so fast that it all came crashing down around them when the levee broke. $497 billion in stock mutual funds is no small amount, and this amount is only the figure invested prior to the crash in 99 and 2000. The bond market has had $480 billion poured into. While we’re not saying it too will fail, it’s a fascinating parallel case in study.
But there is a flipside to all of this. Irrationality is a silly thing, and selling Qualcomm at $450 a share must have been a relief. That is until Qualcomm suddenly soared to $700 a pop late into December. That is just another lesson in not following popular opinion. Bonds and stocks have an inverse relationship, which is why as stocks have dipped bonds have soared. More than anything keep an eye out for oil prices; black gold is a great barometer of sentiment and an indicator of any rally to come. Pick up stocks with low valuations now, because economic indicators are picking up and consumer confidence is slowly returning. It’s always the early bird who gets the worm, and you do like worms, don’t you?
