Legendary value investor Benjamin Graham once said “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.” Now more than ever, Benjamin Graham’s wise words must be remembered. Just because a stock goes down after you buy it doesn’t mean you made a poor decision. Similarly, just because it went up doesn’t mean you’re a genius.
With stock prices falling daily, many bargain hunters who have bought financial stocks of late are being ridiculed as fools. “Never catch a falling knife,” they say. “Cut your losers and let your winners run,” they smugly remind you as if it’s an immutable law of the universe. When financial stocks seemingly inevitably sink lower, those same people will point and say “I told you so. If you’d listened to me, you wouldn’t have lost 10%.” That may be true in hindsight, but nobody knows the future. Unfortunately, the $2.99 crystal balls at Target are for novelty purposes only. This sort of thinking is a perfect example of the bandwagon fallacy I talked about yesterday. You are neither right nor wrong because everybody else agrees or disagrees with you.
Contrarians Win In The End
At its core, Graham’s value investing is a contrarian strategy. Popular industries or companies rarely make good investments, rather, it is the downtrodden, rejected, and industries with a questionable future that are likely to hold the best bargains. Value investing requires self-confidence and a strong resolve to buy and hold companies everybody else is publicly lambasting. Let’s face it, banks are essential to not only the modern economy but to civilization itself. World governments will not allow the system to collapse and are willing to pay whatever price is necessary to enforce their will. Today’s investor in financials are likely to be extremely generously rewarded over the long term. All it takes is the courage to act when the world is screaming at you otherwise.
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3 responses so far ↓
1 Curt // Jun 24, 2008 at 3:23 pm
Great post, but I still don’t feel good about investing in the financial sector of the market for several years. Time gets more important as you get older. Sometimes, you cannot say, ‘I will just wait 10 years for my stock value to return’. The other problem is borrowed money, because as the economy goes down, many people are forces to sell because the money they invested is not their own and they need to pay it back. Borrowed money can run counter to reason in the market. The fear that is spreading in the market is based on fundamental weakness. The US stock market is no longer a good investment as inflation is eliminating the rewords of owning US stocks.
Investors like to talk about how everything will be ok and stock prices will return, because if they don’t then they are out of a job as people move their money into other things. I think the economy is going to shed a million more investor jobs before the party is over. Get out while you still can.
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