Sorry, everyone, but real money columnist Paul Price has a little tough love going your way.
“This little guy,” he wrote recently, “is almost always wrong. When they pull money out of stocks, you should do the opposite.”
This is the beginning of one of the most classic investing advice, going back to Warren Buffett himself. This wisdom suggests that investors should trade counter-cyclically with the market. When everyone buys, it’s time to sell. When everyone is selling, that’s the best time to buy.
It may be common sense, but the cliché is there for a reason.
Here, many investors will go with the flow. In some cases, their strategies were too short-term. They calculate profits in days (if not hours) and build portfolios that can’t wait for the market to recover value or start selling low.
In other cases, investors are simply acting on sentiment. They follow their fear or fear of missing out and often make worse trading decisions for it.
This is especially true of retail investors. When the market fell sharply, many retail investors wanted to do something to protect their portfolios. Unfortunately, this often puts them in the worst possible situation.
For example, “with just one session left, there’s no denying that stocks could have their worst January since 2008,” Price wrote. “As of Jan. 27, about 44% of all Nasdaq stocks are down at least 50% from their highs. This rarely happens in the 21st century.”
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After all, “However, many of the companies that were beaten never made money. Those should have been eliminated from ridiculous valuations.”
Any good news to see? Yes.
The AAII (American Association of Individual Investors) sentiment survey at the time showed that this was one of the widest spreads between bullish and bearish members since 2013.
“Why is this good news? The public is almost always wrong when it comes to market timing. So extreme bearishness is a very positive opposite indicator.”
In fact, the S&P 500 surged about 6% over the following week, returning to those levels a week later. (Well, the unprecedented geopolitical crisis since then doesn’t mean the indicator isn’t working. Despite weeks of volatility, the index is now well above its January lows).
Broadly speaking, there are two takeaways here: First, despite the rules, don’t invest in companies that aren’t worth your money. Just because a stock is well-known or has fallen, it doesn’t always mean you should buy. See if they can answer simple questions like “Can the company make a profit.”
second? Sometimes bad news can mean very good things.
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