For decades I taught younger portfolio managers and trading professionals that the best investment strategy is always to “Do the Opposite.” Virtually every summer this would mean buying while others are selling and bids are few and far between; most of the world is on vacation and markets are sluggish. I saved the following update concerning trading flows deep in the summer months – July 27th (Canadian data, but no doubt the flows were mirrored in the U.S.):
- Equities: Largest weekly outflows in 2012 ($9.7bn – mostly via ETF’s).
- Commodities: Largest weekly outflows in 9 weeks ($1.0bn – mostly via gold & silver funds).
- Bonds: $3.7bn inflows (inflows in 40 out of past 42 weeks).
During the summer (like virtually every summer) sentiment stunk, and this was reflected in activity. Out with the stocks and commodities and in with the bonds. And just like it was in the summer of 2010 (when I wrote my more recent book), bad news in June and July was blown way out of proportion and any good news (improving housing market this time, continued easy monetary policy etc.) was ignored.
So today, less than 2 months later the mood has improved substantially. On Friday Sept. 7th a friend (trading pro at major U.S. investment bank) sent out this market note:
Markets – throwing in the towel and you should too. Given the lack of activity, Draghi, technicals, China, election, and still a possibility of QE3, anyone waiting will likely have to throw in the towel. We saw some real buying coming in yesterday but not panic buying – I think more fundamental accounts will follow shortly.
Just a month before in early August, a brilliant if under-employed (okay, prematurely retired might be a more apt description) investment thinker published this warning:
“….being in ‘denial’ usually results in the investor ending up even more wrong. This is a heady subject for students of behavioural finance, but for the rest of us, with 10-year Treasury bonds yielding only 1.6%, missing the opportunity to make any real money is hardly what I’d call being cautious.”
Those who reacted to the summer headlines and were bearish (selling their stocks in June and July) and are now “throwing in the towel” and reversing course, have in a remarkably short period of time already missed some decent returns. Put another way, it would take longer than five years invested in CD’s to make anything close to the 9% (from July 25th to Sept. 17th) you could have earned by “doing the opposite” instead of running with the lemmings.
Commodities also rallied huge during the same time frame. Strategists were constantly remarking that the economic data coming out wasn’t all that bad; yet they still kept predicting a worsening global scenario. Savvy investors should’ve been buying while the rest were bailing.
As I’ve discussed on many occasions, there’s just no upside politically (one’s job is immediately at risk for recommending risk) to preaching against the consensus opinion, even if there may be substantial financial gain for clients. In an investment firm, any analyst disagreeing with his/her peers and subsequently being right is sure to make enemies. This is precisely why advice today is seldom worth acting upon, unless used as a gauge to inspire one to ‘do the opposite.’ Just as a reminder, if you’d been more like George Costanza (Seinfeld) three years ago, and bought (i.e. you did the opposite) rather than sold in a panic, then you might be perfectly happy with your equities since then. Despite the generous rates of return afforded by stock markets over the past few years, most folks still believe we’ve been in a bear market since 2008.
So what would be doing the ‘opposite’ right now? You might not have bought into risk during the summer but “if” you had, then you would likely be trimming (taking some profits) right now. Strangely enough, everyone every year forgets how unstable late September and early October can be. Raising some cash (why not sell the stuff you bought for a good yield that went up in price so much now pay a tiny yield) might qualify as doing the opposite and when we do get our seasonal correction don’t hesitate to start buying. You won’t want to do it, but what worked for George in this video will work for you.