By John Reizner |
The term “contrary opinion” in the field of equities refers to taking the course of action which is least popular in the stock market. Simply said, it means buying stocks when the majority are selling and selling when most others are buying. This often means taking an action which is against the emotions you may be feeling.
Generally when the market is rising strongly, the predominant mood of investors is quite buoyant and many players will often “catch the buying fever” if the increase in market values are strong enough. When a stock or the market is being marked up, the individual “feels” richer as he or she has increased profits on paper (the profits are not realized until the shares are sold). The investor may buy certain stocks that will make him feel better emotionally or feel like he is doing the safe thing. However, in many cases, according to the theory of contrary opinion, that may be exactly the wrong time to buy shares. When most analysts are positive on a stock, it is probably time to sell, and the reverse. The time to sell is when your shares are at a premium, at a price that will bring you a good return, while you may be feeling good about the stock and many analysts are touting it. If you are a seasoned enough investor, and believe in the power of contrary opinion, you will take the enthusiasm surrounding the stock as an opportunity to sell shares at the highest possible price.
A reverse scenario also holds true. For example, sharp declines in a company’s stock price produces a reaction of fear in most people as they see their stocks decline in value. But if you are experienced enough, you will see that more profits in the market are made by buying when there is fear and panic in the market or your stock candidate, as the emotions of the day may be unnecessarily pushing the stocks downward to a bargain level. The point to buying a good company, whose stock is under pressure where you might be feeling fear, is to make money by selling when the market mood is more buoyant. The firm may be an otherwise good company whose stock is overreacting to unfavorable news or the decline in the general market - the stock sell off may be only temporary. You will have to weigh company specific factors. You can also weigh the analyst opinions out on the Street - are they divided, or are they mostly positive or negative? Usually a one sided analyst consensus is the wrong way to go. Remember, when most all players are on one side of a trade, consider taking the other side.
One of the most glaring examples of buying when the prevailing opinion is on the sell side was illustrated during the real estate and banking crisis of the late 1980's and early 1990's. The atmosphere for banks and real estate was quite poor, to say the least. Banks were failing left and right - the bank where I held some of my investments had only two banks on their buy list. A common expression of real estate developers and investors, some who were going or close to broke at that time was “stay alive till ‘95".
As I explain in my Kindle book, A Way to Wealth - The Art of Investing in Common Stocks, my reasons for my purchases of Wells Fargo and CoreStates Financial (now Wachovia) in the early 1990's was that Warren Buffett and company insiders (in the case of Wells Fargo) were buying. Wells Fargo in particular had large real estate loans on their books, which many believed were going to default, bringing the bank down. One really had to use the power of contrary opinion to buy bank stock at that time. Most analysts were extremely negative on banks - yet at least one investor, Mr. Buffett, saw something different in Wells Fargo. He apparently did not believe the run of negative declarations coming from analysts and fearful public opinion. I read interviews with fine money managers, watched financial television, steadied myself against the torrent of negative opinions - and bought the stock. Since then Wells Fargo stock has appreciated 1000%.
Another example of one of my purchases where contrary opinion was a factor, also represented in my eBook, is MBIA, a municipal bond insurer. In 1994, it was discovered that the Treasurer of Orange County had lost over a billion dollars of County money speculating on the future of interest rates. The County fell into bankruptcy. MBIA’s shares sank under selling pressure. Some must have believed that the company was insuring Orange County debt and would be on the hook for it. I found through my reading on what was transpiring that MBIA would not be severely compromised and that the sell-off and the fear in the market concerning the company was an opportunity to pick up shares, which I did. Also, company insiders were picking up shares, a further sign of confidence (see my eBook for more on the importance and analysis of insider transactions). This has been a quite profitable transaction.
In my own mutual fund holdings, most which I have held for well over a decade, there was a period during the 1995-1999 technology stock euphoria when one of the fund companies where I invested actually lost customers because the fund manager chose not to buy increasingly overvalued tech stocks. After the market broke in 2000 and technology stocks crumbled, this company’s funds performed well and garnered positive reviews and attention for their manager’s long term value approach. An inflow of new investor money came into the fund. And so the choices of investors can change over market periods of optimism and pessimism, and be influenced as much by emotion as by common sense. The lesson to this story is that it often pays to act contrary to the euphoria or crazes of the day and not participate, as they almost always end poorly.
So I think it takes experience and courage to take actions with your money in the stock market that is contrary to what others are doing. I think that this is a skill which can be acquired over time. In my eBook, I illustrate a two-pronged approach to profiting in the market which often points to stocks that seem contrary to the prevailing emotional winds of the day - one need not be an expert or extremely sophisticated in stock market lore to practice this method.