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Weekend Reading: Time To Be A Contrarian?

Written by Lance Roberts | Oct 21, 2016

be-a-contrarian

In yesterday’s post, I discussed Howard Mark’s view on being a contrarian. To wit:

“Resisting – and thereby achieving success as a contrarian – isn’t easy. Things combine to make it difficult; including natural herd tendencies and the pain imposed by being out of step, particularly when momentum invariably makes pro-cyclical actions look correct for a while. (That’s why it’s essential to remember that ‘being too far ahead of your time is indistinguishable from being wrong.’)

Given the uncertain nature of the future, and thus the difficulty of being confident your position is the right one – especially as price moves against you – it’s challenging to be a lonely contrarian.”

The important point of his comment is that being too far ahead of a turning point (either bullish or bearish), even though ultimately being proved right, is still “indistinguishable from being wrong.”

However, there is a huge difference between being making the right call early, particularly when the trend is changing from bullish to bearish, and making no call at all. 

The “buy and hold” mantra is essentially based on the premise that stocks rise much more often than they fall, and since you are either too stupid or lazy to actually understand how investing actually works, you are just better off making investments and forgetting about them. Hopefully, you will win.

This is the equivalent of saying: “Since 8 out of 10 people who play ‘Russian Roulette’ survive the first pull of the trigger, the odds are in your favor of winning.”

While that is entirely true, it is the 20% of the time you lose that matters most.

The chart below shows the long-term view of the market, going back to 1920, as compared to GAAP valuations. This is a QUARTERLY price chart which also shows the points in history where valuations have collided with extreme overbought conditions. 

sp500-valuations-chart-102016

While hindsight is pretty clear about what happens given the current environment of weak economic and profit growth combined with high valuations and deteriorating technical underpinnings, the ultimate outcome took months to develop. Just as with the “boy who cried wolf,” warnings eventually fell on “deaf ears” at the point those warnings actually mattered. 

Currently, there is little argument the “bullish trend” remains intact. As such the mainstream analysis, if you can actually call it that, continues to the tout the inherent benefits of low cost, passive indexing and the ultimate “chase for yield.” However, it is here the real danger lies. Much of the monetary flows into passive indexes is actually NOT PASSIVE. When the eventual reversion comes, and it will, the pain inflicted on individuals, as is always the case, will turn “passive indexers” in “panicked sellers.”

It is here that being a contrarian will pay its dividends. Unfortunately, as is too often the case, there are few individuals who actually “sold high” in order to “buy low” when the real long-term investment opportunities are “laid to bare.”

In the meantime, here is what I am reading this weekend.


Fed / Economy

 


Markets


Interesting Reads

 


“The only reason a great many American families don’t own an elephant is that they have never been offered an elephant for a dollar down and easy weekly payments..” — Mad Magazine

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Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube

2016/10/21
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Retirement