If you want to invest against the current, arm yourself with patience and discipline

(Photo by Christopher Burns for Unsplash)

All investors dream of being able to buy stock market securities at their lowest levels and sell them when they reach all-time highs. In reality, few people can adopt this contrarian mindset, which nevertheless has a place in investments, according to portfolio managers.

“You can’t generate good long-term returns just by buying assets that have been going up for a while,” says Mary Hagerman, portfolio manager and financial planner at the Mary Hagerman Group, a Raymond investment firm. “If you define contrarian investing as buying assets that are out of favor, you might say that I qualify for that strategy at times,” he says.

Some might call this philosophy very dangerous because it can mean trying to synchronize with short-term fluctuations in the stock markets (market timing), a strategy that usually serves investors poorly.

Every year since 1994, the American company Dalbar has published a report on the quantitative analysis of investor behavior. The paper shows that over periods ranging from 12 months to 30 years, the average stock investor consistently underperforms the benchmark S&P 500 index.

In other words, by choosing index investments rather than multiplying trades, the average individual investor would become wealthier.

But Martin Roberge, managing director, portfolio manager and quantitative analyst at Canaccord Genuity, draws a line between investing that tries to synchronize with stock market movements and investing against the tide.

“Take the example of Alphabet (GOOGL, $122.28), whose stock suffered a correction following the release of its latest quarterly financial results. Someone looking to time the buy with a stock decline would buy the stock thinking the Nasdaq, which includes Alphabet, has overcorrected and is ready for another bull cycle. He wants to learn about technology and chooses his hobby through the parent company Google,” he explains.

Portfolio manager says contrarian investor doesn’t ask about Nasdaq. He buys Alphabet shares because he believes that after the correction, his research shows that the stock’s valuation has become attractive and already includes the worst concerns that have pushed the stock down.

TO BE CONTINUED: Misunderstood strategy

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