Buy Low Sell High
If you have heard it once, you have heard it one thousand times. This age-old advice is the epitome of the saying “it’s easier said than done”.
In recent months, my favorite sector, the financial sector has taken a beating. Many of my favorite stocks are now boasting dividends in the mid to high single digits. These dividend yields are quite a bit higher than the average yields for these companies, not to mention that some of the largest banks in the gargantuan US economy are selling at 10-12 times earnings!
Enter Investor Psychology
Even though I have a long-term investment strategy and believe in the future prospects of companies such as Citigroup (C) and Bank of America (BAC), I still have a hard time pulling the trigger when all of the news outlets are forecasting nothing but doom and gloom.
Money is made when one is brave enough to accept a risk that few others are willing to take. We must be willing to step out on a limb and believe in our strategy from time to time, for there is no reward without risk!
Brave or Stupid…You Decide
A recent article in the Globe and Mail outlined the following, which I thought was a spectacular move, and outlines some of my own thoughts:
Bill Miller, the famed mutual fund manager at Legg Mason, might describe as predictable, but illogical, market psychology.
Studies repeatedly show investors place too much weight on information that’s (a) recent, and (b) dramatic. The multibillion mortgage writedowns at U.S. banks are both.
Mr. Miller, who beat the Standard & Poor’s 500 for an incredible 15 consecutive years, has been getting enthusiastic lately about U.S. financial stocks. At the moment, he looks foolish and stupid. Two years from now, he’ll be thought of as brave and wise.
What Mr. Miller is referencing is a common strategy known as contrarian. Being a contrarian is just as it sounds. Contrarian investors buy solid stocks that have fallen out of favor with investors, mainly due to recent news and “panic“.
Mr. Warren Buffett actually played a contrarian role the last time that the financial sector was out of favor in the early 1990’s. Buffett took a large stake in Wells Fargo when everyone else was running far and fast from the financials. If you take a look at a 15 – year chart for Wells Fargo, you’ll see that Buffett looks Brave and Wise now, not Foolish and Stupid!
Buffett also made recent headlines for his investments in Goldman Sachs and General Electric, not to mention a NY Times article in which he proclaimed that his personal portfolio is currently being invested in United States equities.
Are you prepared to look foolish and stupid for a few months in order to look as brave and wise as Warren Buffet in the future?
If so, you too could be taking double digit dividends (and capital gains) to the bank 10 years from now!