April 15, 2014

Mary, Mary, Quite Contrarian

Credit: africa
Mary, Mary, quite contrary. How does your garden grow? No, I haven’t lost it or begun experiencing some sort of Benjamin Button-like reverse-aging process. I just think this old, English nursery rhyme might have a little more to do with successful long-term investing than you might think! Let me explain.

Have you ever jumped on a sports team’s bandwagon? Have you ever jumped off and been accused of being a “fair weather” fan? Have you ever resisted a trend, such as smartphones or Facebook, and eventually come around? Did you by chance donate your seersucker suit or throw away your boat shoes right before they came back in style? I’m a loyal sports fan, and the day I wear a seersucker suit will be quite a day, but I must admit that I can think of several times in my life where I arrived a little late to the metaphorical party, and even a few occasions when I rode a trend, a belief, or an idea all the way down the metaphorical flagpole. I usually stick to my guns, and I will always stand up for what I truly believe in, but it is often much easier to get caught up in what everyone else is doing and follow the crowd. It’s often warmer in the herd, so to speak.

Unfortunately, the bandwagon doesn’t always lead to successful investing. I’ve heard it jokingly said that if someone continuously buys stocks high and sells stocks low, they will repeat their actions until they are broke. It’s a witty and true statement, but it’s definitely not funny. I’ve also heard it said that any stock tip you hear is already too late, and unless you know something you probably shouldn’t know, I tend to believe that is pretty accurate. In my book, successful investing is about developing a prudent, long-term investment strategy with an appropriate mix of stocks, bonds, cash, and other investments for your risk tolerance and age/stage in life, and sticking with it. Successful investing is about investing, not trading. It’s about not chasing past performance and trying to repeat recent results with last year’s hottest industry, sector, or stock. Successful investing is about avoiding the temptation of a $700 “poison” apple (or should I say AAPL?), and at the same time, knowing to ignore the same overly sardonic radio host who has been telling you to go to all cash or gold for the last five years. Sometimes you can buy a stock high and ride it higher or sell a stock low and it will still go lower. However, I have come to believe that successful portfolio management is usually about investing in a diversified strategy filled with quality companies; buying some positions for value and some positions for growth; watching closely and looking for occasional tactical opportunities; and riding the market volatility as if it were a cross between a mechanical bull and an eventually upward-headed escalator.

I cannot tell you how many potential clients and friends have come to me recently ready to get back in the market now that the market has been on a fairly steady upward climb for almost five years. Unfortunately, they’ve been on the sidelines, primarily invested in what they put their temporarily battered portfolios in near the bottom of the last real market downturn. In the long term, it’s good that they are getting back in, but I can tell you right now that we are closer to the next temporary downturn today than we were yesterday. I just hope they don’t sell at the next bottom and repeat until they are…

So many people cheer for a winning team and so few for a losing team. As I said earlier, it’s natural and easy to do, but successful investing is about having a really good strategy in place that you understand, believe in, and have confidence in. It’s about digging in for the long haul and letting your portfolio do its job. It’s sometimes about selling when the tide is coming in and buying when the tide is going out. It’s about cautiously looking around when the masses are stampeding in one direction into all stocks or all bonds or all cash or all precious metals and at least considering the road less travelled. Now don’t take this strategy to the extreme and sell a bunch of good stocks so you can buy a bunch of “stinkers,” but rather reflect on where markets are going, not where they have been.

I’m not asking you to do anything in particular. I’m just asking you to think about being a little contrary to a majority of the bandwagon investors out there. Think about being a little contrarian.

Mary, Mary, quite contrarian. How does your portfolio grow?


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