Free 7-day Trial
All Articles and Columns »

Buy what everybody hates. Mentally difficult, financially brilliant!

July 28, 2012 | About:
The AAII sentiment survey dated July 12, 2012 showed the lowest level of bullishness since the October 2010 market bottom. Of course, the dour October mood was inspired by the big sell-off from the April 2010 high that preceded it.

Nothing makes investors more bearish than having just gotten their collective bullish asses kicked. That was especially true after a series of false, fit and start rallies in May, June and July that year.



That exact point of maximum pessimism marked the beginning of an almost uninterrupted more than 30% rally which lasted six months. Those who missed the entry point never got a ‘fill the gap’ decline to get invested. You paid a big price for being out at the turning point.

The July 12th low in bullishness by ‘mom and pop’ traders followed a significant six-day sell-off after what many suspected was a false start rebound in June.



Only time will tell if we’re at the start of another multi-month, large percentage rebound in the broad averages. What’s already history is the rebound to above 13,000 on the DJIA for the first time since early May.

Professional financial advisors are often guilty of giving clients what they want rather than what they need. Most private investors match the AAII profile. They ask for whatever’s just finished doing the best while shunning asset classes that have recently done badly but offer the best values and the chance to rebound strongly.

SentimenTrader’s excellent chart shows how financial advisors’ recommended stock allocation is now lower than the 2009 lows. Conversely, their weighting towards bonds (offering the lowest coupon rates in our lifetimes) is now at all-time highs. This is nothing short of insanity.



Everything in nature regresses from extremes towards normal over time. Demand for stock will rise again. Those willing to lend money at negative real interest rates are sure to diminish in magnitude.

When will the tide turn? Has the train already left the station? Nobody can say for sure. I defer to The Bard for the answer to that question.

“Better three hours too soon, than one minute too late.”

…William Shakespeare

Failing to plan is planning to fail.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.MarketShadows.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 3.6/5 (14 votes)

Comments

superguru
Superguru - 1 year ago
Problem with this philosophy is that wait can be very long.

I remember when I started in 2007 - 08 learning investment on Gurufocus, wisdom on this board was that Bonds are bad investment and ready to crash any time. Also it was to avoid Gold. (only reason for this wisdom was, as I later learned, that Buffett does not like these two asset classes.)

Those are exactly the two asset classes that have done well.

The people on gurufocus forums and gurufocus are very focused on "values stocks" and that is excellent. But remember "Value Stocks" is just one strategy in one asset class.

Also valuation in stock market does not indicate that it is hated.Your argument is based on sentiment surveys and not fundamentals. Surveys are very unreliable. You might as well use size of skirts. How can something be fairly valued to slightly overvalued and be hated at the same time?

Dr. Paul Price
Dr. Paul Price premium member - 1 year ago


All asset classes compete.

With fixed income coupon rates at lifetime low levels stocks should theortically be priced at much higher P/Es than normal.

Instead they'd look mildly undervalued if risk-free rates were 5% - 7% and extremely attractive considering today's ZIRP.
Dr. Paul Price
Dr. Paul Price premium member - 1 year ago
A quick glance at the recommended allocation charts in my article shows the total reversal of opinion regarding ownership of equities versus bonds from early 2007 compared with the present.
superguru
Superguru - 1 year ago
Only asset class that looks somewhat cheaper is Residential Real Estate (and may be European stocks.)

"With fixed income coupon rates at lifetime low levels stocks should theortically be priced at much higher P/Es than normal."

Based on Shiller P/E stocks are priced higher than normal.
superguru
Superguru - 1 year ago
"A quick glance at the recommended allocation charts in my article shows the total reversal of opinion regarding ownership of equities versus bonds from early 2007 compared with the present."

- You have a good point here. Worth thinking about. Until it gets reflected in stock prices it is not much of use to me.

tonyg34
Tonyg34 - 1 year ago
alright, guess I'll load up on steel manufacturers, auto companies and for-profit education providers...

I see no evidence here to suggest you (we) can beat a simple balanced fund.
superguru
Superguru - 1 year ago
"I see no evidence here to suggest you (we) can beat a simple balanced fund." - Tonyg34

I agree. Wish I had realized this 5 years back. I would have made much more and invested much less time.

sapporosteve
Sapporosteve premium member - 1 year ago
Tonyg34 - it depends on your timeframe doesn't it? I dont think he is suggesting you load up and look to cash in in 3 or 4 months time. But as a general rule, buying when there is blood in the streets has led to outsized gains.

As his headline states it is "mentally difficult". And that is the hardest part for most people. They all see a continuation of the recent past - investing in the rear view mirror.

Personally I look at where the market will be in 3 to 5 years time. Will it be lower- maybe but I doubt it.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Hide