First and foremost, know this: The U.S. economy and financial markets are not tanking. They are undergoing a massive change that will provide not only investment opportunities, but also economy improvements that we haven’t seen in years.
Why and how will these opportunities and improvements occur?
I have been writing articles explaining this rebuilding process. However, they are piecemeal articles. It would take a book to provide a thorough explanation. The problem is, if you were to see, “The Full Explanation,” by John S. Tobey, CFA, your first (and final) thought would be: “Who is this guy? Why does he think he has the accurate view that everyone else is missing? Phooey!”
So, how do I explain how a well-timed, contrarian view can be formed and acted upon when the popular trend seems irreversible. Let me try a different approach, by describing what successful contrarian investment thinking requires:
- First, accumulate knowledge beyond current events and an institutional education. An especially good source is the older, well-written books that use past events to reveal investing truisms. Without current news and feelings clouding the issues, a real understanding can be learned.
- Second, focus on investing. While investing developments and trends can have some similarities over time, the differences are always numerous. Moreover, what’s important one time can be unimportant in another. Therefore, remain curious, focus on developments and be willing to change analytical approaches.
- Third, build extensive experience. “Build” means experiment, adjust, evolve and act. While investing environments inevitably change, experience provides a helpful investing sense – a form of intuition.
- Fourth, innovate. When believing a potential, contrarian change is afoot, the question is what to do about it. A good strategy will likely be an approach different from what the past trend was.
- Fifth, once a contrarian viewpoint is made, continue testing your thought process as new facts and events come in. Doing so will strengthen your resolve.
- Sixth, don’t fall into the always-contrarian mindset. Being contrarian at the right time provides the value. Being a perpetual naysayer does not.
Today’s contrarian viewpoint key components:
First, the Federal Reserve made a huge mistake overriding the capital market’s key role of setting interest rates. Worse, by keeping interest rates near 0% for a decade, the Fed “educated” investors on the notion that the Fed was doing something good, so today’s inflation battle rate-raising must necessarily be bad.
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Second, there is a widespread misunderstanding of inflation:
- What it is – fiat (AKA, paper) money erosion – not simply rising prices
- How to properly measure it – especially don’t rely on the highest moving 12-month number
- What its benefits are – stock prices, earnings and dividends are all based on non-inflation-adjusted numbers (therefore, don’t use inflation-adjusted GDP growth as a measure of stock market strength/weakness)
Third, the news is almost completely negative – what’s wrong and why that means a recession and a stock market crash are inevitable.
As I mentioned in my last article, it’s a rule: When “everyone” in negative, the bottom is here or near.
The bottom line: Never bet against common sense
“Common sense” plays a large part in contrarian thinking because the popular rationale at bottoms (and tops) always lacks it. Instead, contrived explanations are created to support the belief that things are not overwrought.
A helpful sign that common sense is not at work is when you have an absolute feeling that the current trend is here to stay. (At such times, even professional investors get those misleading feelings.)