GEORGE COSTANZA AND INVESTING
One of my favorite episodes of the sitcom ‘Seinfeld’ was where George Costanza, down on his luck, decided to do the exact opposite of what his instincts would normally dictate. His ‘do the opposite’ philosophy ended up getting him the beautiful women and a coveted job with the New York Yankees.
Investors can learn a lot from George Costanza. Remember last summer when every TV or radio story was about the damage caused by the BP oil spill in the Gulf of Mexico. As I wrote at the time, for savvy investors, this disaster proved to be a huge opportunity to profit. While it may seem a bit crass to invest when birds and fish are dying, or entire industries are being decimated, smart investors lick their chops when such disasters strike. Why? Because they focused not solely on the damage caused by BP, but rather on the damage caused to BP’s stock price. This was a classic case of what is termed, ‘contrarian’ investing.
Investors who go against the general market trend are called ‘contrarians’. A contrarian believes that crowd behavior among investors can lead to exploitable mispricings in the securities markets. For example, widespread pessimism in the banking sector has driven banking stock prices so low that it may overstate the sector’s risks and understate prospects for returning to profitability. In the case of banks, a contrarian investor would make the case that the sector has dealt with the problems from the subprime scandal, have taken provisions against bad loans, have cleaned up their balance sheets and have lost more than half of their value over the last few years. I want to emphasize that this is by no means a recommendation to buy bank stocks — it’s just a good example to explain the concept.
Identifying and purchasing such distressed stocks and selling them after the company recovers can lead to above-average gains. Conversely, widespread optimism can result in unjustifiably high valuations that will eventually lead to drops, when those high expectations don’t pan out.
Backward Thinking?
Unfortunately, some investors have an inverted perception of risk. They tend to buy stocks when they have already appreciated significantly and sell them after they have already gotten crushed. However, this is the opposite of the golden rule of investing: Buy low and sell high.
Baron Rothschild, member of the Rothschild banking family, is credited with saying that “The time to buy is when there’s blood in the streets, even if the blood is your own.” This motto has served shrewd investors for decades. The most famous of all investors, Warren Buffett said, “You pay a very high price in the stock market for a cheery consensus.” In other words, if everyone is in agreement about a particular investment, it may not be a good one.
It’s Time in the Market, Not Timing the Market
For most investors, contrarian investing may be helpful to help enhance returns but is generally no substitute for a proper strategic asset allocation. Study after study has shown that investors do best if they are invested in the market and not sitting on the sidelines waiting to hit a home run. For example, if $10,000 were put in an investment that performed similarly to the S&P 500 Index from December 1990 to December 2005 and left untouched, this sum would have grown to $51,354 by the end of this time. However, if the investor missed even the 10 best days of the stock market during that 15-year period, his investment would have grown to only $31,994. And missing the stock market’s best 50 days during that time would have led to a loss – the original $10,000 investment would have been worth only $9,030 by the end.
While buying and selling constantly and trying to time the market are not always advisable, it is worthwhile remembering that there are always opportunities in the market, especially after it has dropped. Analyze investments objectively without getting caught up in the hysteria and speculation that scares panicked investors and you could potentially profit when common sense returns.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, SIFMA. For more information, visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il
