During Summer 2000, when the stock market had just passed what would become its all-time peak, I wrote an article for a now-defunct magazine called Online Investor about a brilliant investment strategy in which I made $75,000 in four months. (Don’t ask what happened to that money or, for that matter, the strategy.) It involved following certain well-known stocks that Wall Street periodically loved and loathed, and buying against the mass opinion. I did a lot of research about “contrarian investing” while working on that piece, and the weird thing was that everyone I talked with or read about — money managers, chat room investors, stock analysts — claimed to be a contrarian.
In contrast, today, with the markets bumping up against long-term lows, the term “contrarian” has just about disappeared from the investing lexicon. And no one wants to be a pound-on-the-table, get-all-your-chips-in-the-center Bull.
This is the time to load up, fire all your guns, and pour your money into the stock market. We may zigzag for a little while, and it’s never smart to buy indiscriminately, but a real contrarian will tell you to get your money down soon.
Contrarianism is about understanding the behavior of crowds and the effect of supply and demand on stock prices. Over the long term, the price of a stock will reflect its fundamental value (i.e., the company’s ability to make a profit). Before “the long term” happens, however, fortunes can be made and lost. On a daily basis, a stock’s price is what buyers and sellers (that day) will pay or receive. If you get together 100 people who want to buy Intel for $15 per share, and 100 who want to sell it for $15 per share, everyone will be happy and Intel’s price at the end of the day will be $15. But what if, the next day, 150 people want to sell for $15 and only 50 show up prepared to pay $15? Those buyers will wise up, the sellers to start undercutting themselves, and the price will fall.
The buyers of U.S. stocks have gradually disappeared, a circumstance that has worsened any real financial slump. Everybody hates the stock market and is terrified about putting in money. To me, that’s a contrarian clue, the exact same situation (in reverse) as when the cabbie and the guy at the shoeshine stand want to give you stock tips.
But how can a rally start when everyone is afraid to buy? The real fuel for the coming rally is that the sellers have disappeared. That’s not true of every stock but just about everyone who wants out has gotten out. There has been so much bad news over the past year that, if you want to sell because you think companies are dishonest, you’ve sold. If you want to sell because you fear the effects of a war on terror, or a war on Iraq, or another terrorist event, you’ve sold. If you’ve weathered all that, you’re not going anywhere. And there is a lot of money waiting to chase stocks for any good reason.
Here is why you should do everything short of stealing money, and maybe consider stealing if you’re absolutely sure you can return the money later, to bet on the U.S. stock market:
First, bad news isn’t moving the market like it used to. Look how the market reacted on Monday to construction spending reaching a six-year low, manufacturing activity contracting for the first time since January, and the West Coast dockworkers being locked out: Dow up 346, Nasdaq up 41, S&P up 32. There just isn’t anyone left who wants to sell out.
Second, the economy is just fundamentally not that bad. We’re at war, but not against nations or armies, but against extremist vandals. Even if we go to war against Iraq, how bad could that be for the economy? Iraq’s military didn’t exactly distinguish itself in combat against the U.S. last time, and it’s probably in worse shape now. Economically, we’ve got low inflation, low interest rates, and unemployment at historically reasonable levels.
Third, the money to invest is poised and ready. The returns on fixed-income investments are minuscule in this low-rate environment. The housing market is about to become overheated. All those people who jumped out of stocks will come back when the prospect of making money in the markets appears.
Fourth, the technology boom has lots of room to run. The Intels and Microsofts and Nokias of the world are far from dead. Intel and Motorola and the other chip companies can keep making microprocessors smaller and faster for at least another decade. If you don’t think there are any more tech frontiers for the masses, you just lack imagination. Put together things like smaller, smarter computers with voice recognition, wireless Internet, and global positioning satellite technology, and you will have the world’s next vital appliance.
Fifth, the media is a great contrary indicator. Just as CNBC parties celebrating Dow and Nasdaq highs in 1999 and early 2000 were a signal that things had gotten out of hand, the recent pronouncements on the death of the stock market signals that people have gone too far in this direction. For two years of bear markets, it seemed the media looked for every possible silver lining or signal of an upturn. Now, I hear interviewers on financial news shows ask guests what parallels we have to Japan and its fifteen-year slump, or whether there is any hope of a recovery for 2004.
If I wasn’t so broke, I’d jump into the market right now. In fact, if the second-hand store will buy a dozen pairs of Bermuda shorts with the crotch worn thin, I still might give it a whirl.