One reason that only a select few people make money in the stock market is because most cannot think outside the box. Most tend to go with the herd rather than against it. However, it is funny because the great investors were all contrarians.
Buffet, Templeton, Soros, John Paulson — all at one time or another made huge bets on stocks or directions of markets that were very unpopular when they first did so.
In late 2008 and early 2009, when fear was high and everyone was worried about banking collapses — and the end of the world — that was the time to be buying. As Sir John Templeton himself said, “Buy at the point of maximum pessimism.”
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For example, in early 2009, I turned very bullish on emerging markets. In March 2009, I recommended getting into emerging markets aggressively, stating that they had unfairly been weighed down by the U.S. banking crisis and their fundamentals were still very strong.
Emerging markets soared and outperformed the emerged world during the next year. However, by late 2010, the emerging-market trade had become too popular. Emerging-market inflows were way larger than U.S. stock inflows. Not surprisingly, in November 2010 most emerging markets saw tops and have declines about 10 percent to 20 percent since then.
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The hot money that drove them higher is now leaving and going into the U.S. stock market. The commentary has switched from the fast growth of India and China to rising inflation in these two nations and the danger in emerging markets due to the volatility in Egypt. We are told that we should be in “safe” Western markets. The shoe is again on the other foot.
Now that emerging markets are again unpopular and seeing outflows, it is ironically the time to look at them. This is the way you make money in the markets. You buy dips and buy negativity and sell greed.
Don’t follow the crowd — go against them.
About the Author: David Skarica
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