Contrarian Investing: Make Money Going Against The Crowd
November 7, 2012 12:13 PM EST
By Marc Lichtenfeld, Investment U Senior Analyst
This weekend, I was at a boxing match, talking with someone affiliated with the show. He used to work on Wall Street. I asked him if he missed it. "Hell, no," he said quickly. "Wall Street makes boxing look like an honest business."
After the financial collapse, flash crash and various scandals, that's the way many people view Wall Street.
And that's despite the current bull market being the ninth longest in history ? out of 26.
From its lowest point to its peak, this bull market was up 121%. After the recent sell-off, we're currently up 118%. That makes the current market the seventh-strongest market in terms of gains.
In an excellent Wall Street Daily article, my colleague Louis Basenese points out that of the eight longer bulls, the second half of the bull market equaled or topped the performance of the first half in five of them.
Yet, according to AAII's Investor Sentiment Survey, only 29.2% of investors are bullish while 43.1% are bearish. The long-term average is 39% bullish and 30% bearish.
So despite being in one of the top 10 strongest markets in history, investors aren't buying it (figuratively and literally). In fact, the average investor's timing has been nothing short of abysmal.
Investors have taken money out of equity mutual funds for 17 consecutive months. In September, the industry saw nearly $14-billion worth of funds redeemed, despite the market making new bull market highs in six of those 17 months.
Just like I advocate betting against Wall Street's sell-side analysts, I also recommend fading (betting against) the general public. As long as there is so much fear out there, the market should go higher...
Fear of the Unknown
I understand the fear ? there's a lot to be fearful about. We're either about to elect a President who's a Kenyan Marxist Terrorist who hates America or a Flip-Flopping, Woman-Hating, Silver Spoon Born "One-Percenter," who's the puppet of billionaire businessmen.
Then, of course, there's Europe (which will surely collapse), impossibly low interest rates that will soon make the Zimbabwean dollar look stable compared to the greenback and a nuclear-armed Iran whose leaders can't wait to let the missiles fly so they can be in the loving arms of 72 brown-eyed virgins.
The problems are real. And there will be new ones rearing their ugly heads soon.
But the world has always had problems. Ten years ago, we were in the midst of the worst bear market in history, one that saw the stock market get cut in half. There was fear that the economy was slowing. (Isn't there always?) We were still licking our wounds from 9/11 and getting ready to invade Iraq in a war that was as unpopular as Vietnam.
Despite those serious issues, the market is up 59.4% during those years ? which also included another nasty bear market and a near financial meltdown. Not bad considering.
How to Play it Safely
If you're concerned about the market, but also see the intelligence of going against the crowd, consider Perpetual Dividend Raisers ? stocks that raise their dividends every year.
Now, many "experts" will tell you these stocks are overvalued, because they've been hot for a while. But if you're investing for the long term, Perpetual Dividend Raisers typically go up more in bull markets and go down less in bear markets than the broader indices.
For example, since the 10-year period ending in 2002 ? not including dividends, just share price appreciation ? the market has risen an average of 71% over 10 years (1993-2002, 1994-2003, etc.). That comes out to an average annual growth rate of 5.5%.
Dividend Aristocrats, stocks that have raised their dividends every year for 25 years, climbed 103% or 7.29% annually.
When you include dividends, the market returned an average of 96% over 10 years or an average of 6.98% annually versus the Aristocrats return of 162%, or 10.11%.
That 10.11% figure incorporates at least one bear market and in many cases two, in each variable in the calculation. I'm sure most investors would be satisfied with earning an average of double digits annually on their long-term money especially after weathering a vicious bear market or two.
A 10.11% compound annual growth rate doubles your money in just over seven years. It triples your investment in just over 11 years.
Avoid Trying to Time the Market
The point is, don't try to time the market. There are problems in the world. There are crooks on Wall Street, but that shouldn't stop you from investing to reach your goals. Just like you don't let the fact that you could get hit by a bus crossing the street stop you from going about your daily activities.
If you're invested for the long term (especially if you're invested in Perpetual Dividend Raisers) and don't give your money to suspicious characters to manage for you, you'll be fine.
When the general public is afraid of Wall Street, that's the time to be invested. You'll be selling your shares to them at higher prices when they come back in droves.