“Confidence is a fragile thing.” – Joe Montana
Stock market volatility makes people nervous. They associate big price swings with instability and risk. Yet the fact remains, when stocks rise and fall day to day, it rarely reflects what’s happening in a business. Veteran mutual fund manager Ron Baron told his shareholders “Market volatility has been made worse by computer driven high-frequency trading.” He thinks in the short term, excessive volatility has actually lowered stock prices by scaring potential investors away (www.baronfunds.com). 60 year lows for interest rates, and gold near all time highs are tangible indications that fear is pervasive. RISK has joined the pantheon of four-letter words, not to be used in polite conversation.
Makes Your Eyes Glaze Over
Here are the common characteristics to every great contrarian investment opportunity.
- Interest in the asset class or company has completely petered out. 10 years ago ~ Remember Gold, Steel, Copper, or energy. Prices were five to ten times lower then and no one was interested.
- If the topic comes up, it makes your eyes glaze over. Today ~ Think about Japanese stocks, bank stocks, and blue chip stocks for the long run. Prices have fallen, yet revenues doubled or tripled over the past 10 years.
- A declining Dollar buys less and less, but the contrarian investment becomes worth more and more. Tomorrow ~ compounding shareholder’s equity at 10% per year gives you twice as much equity (book value) in seven years.
Logic suggests following these three simple guidelines should lead us to the new 5 and 10 baggers of this decade. So what gets in the way? Why are so few people able to buy low when no one is interested, be patient, and then sell high when everyone is willing to over pay? Investors have trouble making rational decisions when real money is at stake. Psychological stress impairs logic, distorts our reasoning, and keeps us from buying true bargains. No one wanted gold in 1999 at $260 an ounce, not even the Bank of England, so they sold it all. Brett Arends of the Wall Street Journal / Smart Money reported that at least “one analyst at the time thought gold was headed for $100. It proved, in retrospect, the bargain of our lifetimes, but no one was interested.”
10 years ago, no one wanted railroad stocks, oil companies, commodities. Since then, many of these investments have quadrupled. So, what’s on sale now? You won’t want to miss the great contrarian opportunities available today. We’ve prepared a rational guide that can help remove negative emotions and put you in a position to hopefully make some meaningful money.
The Pilot’s Check-List for Safe & Effective Investing
Every good pilot knows that a thorough check of his or her aircraft is essential before lift-off. Once the airplane is airborne, there’s no place to pull over if a mechanical problem comes up and so pilots want to make sure nothing is wrong before they leave the ground. High in the sky is no place to find out a magneto is bad, a rudder is sticking or an engine isn’t firing properly.
And the same holds true for investing. You don’t want to be stuck with AIG down 96% from $30, Citigroup down 95% from $40 or G.E down 60% from $35. Holding on and hoping for investment survival is not where you want to be.
Using an investment checklist can give you a set of benchmarks for evaluating investments before you actually take the plunge. Like a good pilot, you should follow this checklist every time you invest to make sure that your potential investment has the wings and propulsion necessary to take flight.
Pick up your copy of “Wisdom on Value Investing: How to Profit on Fallen Angels
” for more on the investing checklist we use at American Money Management LLC.
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