I just came across an apparently defunct blog (no posts since June.) It’s called Big Mike’s contrarian investing blog, and it seems that he advocated a lot of the same things I was recommending to clients. The difference is that my clients are still in them… I have my doubts about Big Mike and the readers of his blog.
[9/4/06 Note: It seems like my guesses about Big Mike were off the mark... see his comment below. Regardless, I stick by what I say about investor psychology... the best time to buy is often when things are most discouraging. And that is precisely when it's hardest to buy... or recommend someone else buy. ]
For those of us who were commodity bulls in this spring, times seemed tough. To be a successful contrarian, you need to keep the long perspective. As Jonathan Graham said, “In the short run, the market is a voting machine, in the long run, it is a weighing machine.” If you invest based on fundamentals, you have to be ready for the market to turn against you for months or years. I’m get the feeling that Big Mike, despite his MBA, BS in economics, and 6 week stint as a broker, did not have the financial or emotional resources to stick it out when the votes started going against him.
John Maynard Keynes once said “The market can stay irrational longer than you can stay solvent.” Big Mike seems to be a case in point.
The moral of the story is that you should never invest money that you need to fund your current expenses. If you place money into an investment because you know that the long term prospects of that investment are good, you have to be willing and able to leave that money there for the decade it might take for the market to stop voting and start weighing again.
Gold’s nowhere near the $730 an ounce it hit in May, and Oil is not much better (ditto for alternative energy stocks), but for those of us who feel certain that the US$ is headed for the trashcan, and uncertainty and fear are only going to increase (which will be good for gold), and that Peak Oil is already showing its effects in the energy markets, the volatility this spring and summer were easy to bear.
Rules to keep in mind:
- Don’t invest on a hunch. You have to have conviction.
- Don’t lose your conviction just because prices move against you.
- If the reasons you became convinced in the first place change, get out!
One last quote from Keynes: “When the facts change, I change. What do you do, sir?” (but don’t change unless the facts change.)