By Jonathan Hoenig, Capitalistpig Hedge Fund LLC
Being a contrarian is lonely. People think you’re crazy.
Consider the cases of gold and Apple.
“There is still a small minority of people out there that believes the world is coming to an end and that gold is the only place to be,” a financial adviser told the Associated Press in November 2000. Gold prices went on to rise 522% over ten years and SPDR Gold Trust, launched in 2004, has grown to $65 Billion.
Even experts aren’t exempt. When Apple went public, state regulators in Massachusetts, barred individual investors from buying the stock. The subsequent return has been over 15,000%.
Though just two examples, consensus views are often wrong. From technicals to fundamentals, everybody has a system and nothing works all the time. If successful investing simply came down to buying “good companies”, value stocks or those which pay dividends, then we’d all be rich.
Regardless of the discipline, one should be skeptical about conventional wisdom or supposed “safe bets”. In reality, history suggests the best ideas are often those which seem to have the most risk. After all, getting a legitimate return on an investment involves taking risk.
So, as much as possible, ignore popular consensus and allow the market’s price action to be the ultimate arbiter. When stocks show strength, out of favor, unloved, and seemingly obscure corners of the financial markets can be smart ideas. The old trading floor (and racetrack) maxim still rings true: you never know until you bet.
As a trader and investor, the point is to assume risk — in a measured and prudent way.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC. At the time of writing, Hoenig’s firm held positions in many of the securities mentioned.
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