Panicking When the Market Is Down
Going against the grain takes courage but pays off.
Stocks are generally more attractive when no one else wants to buy them, not when barbers are giving stock tips. It's very tempting to look for VALIDATION - or other people doing the same thing - when you're investing, but history has shown repeatedly that assets are cheap when everyone else is avoiding them. (Sir John Templeton: "The time of maximum pessimism is the best time to buy.")
1979: Business Week cover story asked the question, "The Death of Equities?"
Not long after, it was the start of an 18 year bull market in stocks.
1999: Barron's featured Warren Buffett on its cover, asking, "What's Wrong, Warren?" and bemoaning Buffett's aversion to technology stocks.
Over the next three years, the Nasdaq tanked more than 60 percent, and Berkshire Hathaway shares appreciated 40%.
Morningstar has conducted every year for the past several years, in which the performance of unpopular funds were looked at. The asset classes that everyone hated outperformed the ones that everyone loved in all but one rolling three-year period over the past dozen years.
The difference can be striking. For example, investors who went where others feared to tread and bought the three least-popular fund categories at the beginning of 2000 would have had roughly flat investment returns over the subsequent three years. That was much better than the market's average annual loss of about 15% over the same time period and miles ahead of the performance of the popular fund categories, which declined an average of 26% during the three-year period.
Going against the grain takes courage, but that courage pays off. You'll do better as an investor is you think for yourself and seek out bargains in parts of the market that everyone else has forsaken, rather than buying the flavour of the month in the financial press.
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