“This time, it’s different.” Why are these the 4 most dangerous words in the language of investing? [Wednesdays: The Independent Investor]
Miles Everson’s Business Builder Daily speaks to the heart of what great marketers, business leaders, and other professionals need to succeed in advertising, communications, managing their investments, career strategy, and more.
A Note from Miles Everson:
Happy mid-week, everyone!
We hope you’re having an awesome day so far.
Let’s kickstart this day with a great lesson on market bottoms. Every Wednesday, we publish articles about basic investing tips with hopes to help you get on the path towards true financial freedom.
In this article, we’ll focus on an investment strategy that many of the world’s greatest investors apply to boost their portfolios.
Keep reading to know why being a contrarian is an integral part of successful investing.
CEO, MBO Partners
Chairman of the Advisory Board, The I Institute
The Independent Investor
Let’s start today’s article with a bit of investing-related storytelling…
In 1939, there was a Tennessee investor who, right after Nazi ruler Adolf Hitler invaded Poland, called his broker and told him to buy USD 100 worth of every stock in the US market that had dropped to less than USD 1.
Aside from being a well-respected figure in the world of investing, this man was also renowned in the field of journalism.
In fact, being a great investor AND journalist enabled this man to earn the role of editor for the revised version of Benjamin Graham’s book titled, “The Intelligent Investor: The Definitive Book on Value Investing.”
The name of this person?
Photo from MoneyWeek
Templeton was an American-born British journalist, investor, banker, fund manager, and philanthropist. In 1954, he entered the mutual fund market and created the Templeton Growth Fund.
His company averaged growth of over 15% per year for 38 years. Until now, the Fund exists to seek long-term capital growth by investing in undervalued companies with good long-term prospects, regardless of industry or country.
According to Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist of Altimetry Financial Research, Templeton is one of the examples he and his team talk about when they teach others how great investors think.
He says one of Templeton’s most famous quotes is this:
“The four most dangerous words in the English language are, ‘This time, it’s different.’”
Why did Templeton say this?
It’s because in times of geopolitical events, investors tend to think the stock market will have a different reaction; hence, they panic. However, when they analyze the patterns, they’ll realize that the stock market’s reaction is the same in every geopolitical event that has happened:
It will take a temporary dip, then after a few weeks or months, it will recover once again.
Let’s go back to the story…
When Hitler invaded Poland in 1939, the stock market dropped and a lot of investors panicked and sold their stocks… but that time, Templeton understood it was exactly the right opportunity to go the opposite direction.
After buying at a low, Templeton acquired a total of 104 stocks in his portfolio, including 34 bankrupt companies. Within 5 years, he sold all those stocks. As a result, he quadrupled his money as almost all his picks ended up selling at a gain.
Additionally, he became a billionaire with his pioneering use of global mutual funds.
One of the great lessons you can learn from Templeton’s investing strategy?
The best time to invest is often when it’s the most uncomfortable time. Professor Litman also agrees with this concept.
Being a Contrarian is an Integral Part of Successful Investing
Contrarian investing is an investment style in which investors purposefully go against prevailing market trends by selling when others are buying, and buying when others are selling.
Aside from Templeton, other famous contrarian investors include:
- Warren Buffett, Chairman and CEO of Berkshire Hathaway
- David Dreman, author of the book, “Contrarian Investment Strategies: The Next Generation”
- Michael Burry, founder of Scion Capital
A contrarian investor often enters the market when others are feeling negative about it. For example:
If the overall market sentiment is negative about a certain stock, many investors are generally in a hurry to sell off their holdings. While that is the prevailing situation, contrarians will see the stock in a positive light.
… and because the market is selling the stock, its price will go down and that’s when contrarians start buying at a low. They believe that the current price is near to or lesser than the stock’s intrinsic value.
Contrarian investment strategies are influenced by two behavioral concepts:
- The basic human tendency of “loss aversion.”
Many traders dislike losses and therefore do all that is possible to avoid them. That’s why some investors fall into the trap of sunk-cost bias because instead of moving on to a new and more promising stock, they choose to stick to a losing trade to avoid risks.
Another instance is when investors sell at a low because they panic the moment the stock market drops. They think that when they sell distressed stocks during those times, they’ll avoid losses.
When these scenarios happen, contrarians enter the market and do the opposite of what many are doing. As a result, they’re often the ones who succeed in the long term.
- The overreaction of some investors.
When looking at profitable or high-priced stocks, some investors will overreact and be driven by glamour. Likewise, when looking at non-profitable stocks, they will create panic in the market and start selling their holdings.
Contrarians work their way through these overreactions. So, they buy when the market is falling, and sell when the market is rising.
Meanwhile, many of the world’s greatest investors find contrarian investing appealing for two reasons:
- By “going against the grain,” contrarians reap BIG gains for as long as they have the time and patience to wait out their predictions. When their predictions happen, they identify opportunities where the herd mentality in the stock market is wrong, and potentially outperform other investors in the process.
… and even if their predictions don’t happen, they don’t feel bad about it. By buying when others are rushing to sell, they’re happy to see their investments pay off once stock prices start going up.
- Contrarians find a great deal of personal satisfaction by being invested or passionate in what they do. Since this investment strategy requires lots of research and market expertise, these investors find it rewarding when they achieve financial gains and their outlook proves to be correct.
Simply said, contrarian investors aren’t looking for short-term gains. Their main goal?
To identify stock market opportunities where the consensus view is wrong, with hopes that their investments will pay off as other investors readjust their outlook!
Because of that, contrarians are comfortable with experiencing a few short-term losses and risks. They are willing to go through the uncertainty that comes with waiting for their views or predictions to be proven right.
Professor Litman says amid fluctuations in the stock market, it’s important that you analyze the patterns first and do your research before making any decisions related to your investments.
These are the things that will keep you from recklessly buying or selling stocks, and letting your emotions overtake you!
There will always be something that would cause the stock market to dip temporarily… but when you don’t learn from these situations, you’ll keep repeating the same mistake, and you won’t easily maximize your wealth and achieve your financial goals.
So, whether the stock market drops due to the pandemic, inflation, or the Russia-Ukraine war, it’s best to remember Templeton and his actions.
He didn’t panic when the rest of the market did. In the long run, his decision proved to pay off with HUGE gains.
Take note of these tips as you invest in the stock market!
Always remember that pattern recognition and not easily conforming to what other investors are doing are paramount to investment success.
Through this, you’ll be one step ahead of other investors and achieve huge profits or gains that will lead to true financial freedom.
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
About The Dynamic Marketing Communiqué’s
“Wednesdays: The Independent Investor”
To best understand a firm, it makes sense to know its underlying earning power.
In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times.
Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept.
Every Wednesday, we’ll publish investing tips and insights in accordance with the practices of some of the world’s greatest investors.
We make certain that these articles help you identify and separate the best companies from the worst, and develop your investing prowess in the long run.
To help you get on that path towards the greatest value creation in investing.
Hope you’ve found this week’s insights interesting and helpful.
Stay tuned for next Wednesday’s “The Independent Investor!”
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Valens Dynamic Marketing Capabilities
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