Against the Herd

My approach to investing can be summed up in one word: contrarian.

Most successful investors I know, no matter what other factors they use in making decisions, are contrarians whether they know it or not. They may call themselves a "value investor" or a "growth investor" or a "momentum investor", but if they exceed market returns, they are likely to be contrarians.

Contrarians buy when everyone else is selling and sell when everyone else is buying. They love stocks that everyone else hates, and hate stocks that everyone else loves. They are cautious when everyone else is euphoric, and are confident when everyone else is fearful.

It is easy to say, "Buy low and sell high," but quite another to actually do it; it requires a contrarian outlook. If a stock is priced "low", it is likely because most investors dislike it. Thus, in order to buy "low", you have to like a stock when most people dislike it. If a stock is priced "high", it is likely because most investors like it. This, in order to sell "high", you have to dislike a stock when most people like it.

Contrarian investing is difficult for precisely this reason: it is counter-intuitive. You have to go against the herd. You have to do the opposite of what everyone else is doing. Your 'feelings' have to be retrograde to those around you.

One corollary to contrarian investing is that a characteristic feature of an early bull market is that nobody believes it. Early bulls are in the "buy low" phase in which nearly everyone is skeptical. They are characterized by gradual rallies during which optimism slowly builds, with interspersed violent shakeouts. During these shakeouts, those who disbelieve the bull reaffirm their beliefs, and even those who believe the bull question them. These periodic steep drops are characteristically great buying opportunities.

One such violent shakeout in an early bull market has recently occurred in the gold and silver markets.

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HUI chart. Click for larger image

A palpable panic has set in. Fear and doubt are pervasive. Even the fiercest supporters of the gold bull are having second thoughts. Only those with courage will see this as an opportunity.

We'll see if I am correct that it is a time to buy for the medium-term.

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thats true. i trade a lot of

thats true. i trade a lot of precious metals equities and they have all recently come down to thier oversold point on negative sentiment. one VERY contrarian investment i am trading right now is Uranium stocks. if you think silver is a thin market. wow. the price of U308 is going vertical as NG prices are forcast to go MUCH higher into summer. theres nothing more despised in the media driven world than uranium, conversely, theres nothing with more profit potential. its almost asymetric risk. look at a chart of tin prices! who invests in tin, virtually no one and yet it is an absolutely essential metal that is going under everyones radar. virtually whatever liberals/eco-ninnies dislike you should load up on, as their minds are so distorted by media-speak that its a gimme they're wrong. an aquaintance of ours is a volvo driving 'socially concious' investment advisor. when she found out we invest in mining she shuddered! and guess what? we absoluetly DEMOLISH her performance gains. you can make money by not being contrarian, but i think it really limits your upside. i loaded up on PM equities in 2000 and have had a very good run, but it should get even better once inflation starts to gear up. thanks mr. greespam your making me rich. good luck with your trades jonathon

Must... quote... movie... "I

Must... quote... movie...

"I like goooooooold!"

So are you buying stocks, physical, or both? There's something nice about holding a chunk of gold in your hand. Or several.

Cap'n, The metal itself,

Cap'n,
The metal itself, although historically a great store of value, is not as attractive nor risky an investment as derivatives of it. Gold mining stocks are leveraged to the price of gold such that a increase in the price of the metal by X increases the earnings of the stocks by AX, where A depends on various things. There is much more leverage on gold derivatives than on gold itself, and they will provide a much bigger payoff if gold remains in a bull market. Of course, with the leverage comes a lot of risk, but hey, I have no wife or kids or mortgage, so better to take chances today than when I actually grow up.