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By: Adrian Mastracci
North Shore News
Business Section, “Loose Change”
Sunday, March 9, 2003
Conventional wisdom reveals that many investors
run to the sidelines for cover during long
stock market declines. They then re-enter
the investment world when the good times
return.
On the other hand, contrarian wisdom happily
welcomes deep discounts. They are excellent
prospects to review investment game plans,
and seek buying opportunities. Like the ones
of present day.
Contrarians have the foresight to recognize
buying opportunities before the masses do.
The contrarian camp can deliver rewards, but
it is not for everyone. Risk is ever present
and contrarian investing is not about always
being right.
As the frosty times unfold and investors bail
out, a “sale” tag appears on some
investments. Contrarian investors revel in
buying quality at substantial discounts.
The emphasis is on quality. The sale can end
abruptly with little or no notice.
Nobody has the insight to pick market bottoms
in advance. Not even the professionals. However,
investors with foresight to buy quality on
weakness can reap long run rewards.
The contrarian secret is straightforward.
It is a three-part strategy:
- Buy quality investments at a discount
before everyone else does.
- Monitor and review your investment
progress.
- Hold the selections for a long time.
Contrarian investors have had at least 10
buying opportunities since 1945. We refer to
them as bear markets.
October 1987 was particularly delightful!
The Dow Jones index plummeted 22.7% in one
day.
Investors have overcome all past bear markets.
Albeit, some were tenacious before they vanished.
Contrarians believe the sun will rise and shine
again on today’s bear market.
Buying quality investments when the masses
are dumping them and running for cover is of
great interest. If the beaten up investments
make sense, they can make excellent buys. Perhaps,
even if the prices fall further. And they might.
While the path is simple, it is far from easy.
Hence, some thoughts for aspiring contrarians:
- Ready the game plan to take part in
the investment “sale” as it unfolds.
- Skip the fanciness. Buy the wide
market where possible, instead of specific
sectors.
- Avoid the investment bandwagons
of the day. Bandwagons eventually fizzle
out and
most investors miss the exit signs.
- Pay special attention to diversification.
Understand risk factors and stay within
the investor profile.
- Expect some contrarian investments
to head south. A capital loss strategy
is a must, such as selling after a 30% drop.
- Contrarians limit market exposure
by committing only a reasonable portion of
the
total portfolio. Say 10% to 20% of the
portfolio.
- A way to adopt contrarian strategy
is to purchase the investments over time.
There is no pressing reason to buy the full
position
at once.
That is it! So, let me summarize. Acquiring
quality at a discount can be rewarding.
Reacting to the markets after the fact is
conventional wisdom. It takes patience and
bravery to travel the contrarian road. However,
the potential rewards can be significant.
Contrarians cope with continuing market fears
and uncertainties. They focus on the long run
horizon.
Do some homework. Deep discounts can be magnificent
buying opportunities.
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