Contrarian Investing: Lessons From the Stock Market Rally

There are a lot of opinions about where the stock market is headed next. I’ve caught predictions ranging from the S&P 500 stock market index headed to anywhere between 1100 or 800 in the next few weeks. Some of the predictions will be right and some will be very, very wrong.

Q1 Publishing’s investment research has concluded the market will not turn around until everyone stops plowing money into it.

In a world filled with innumerable headlines and an endless supply of differing opinions, it’s easy to forget stock prices are driven by buyers and sellers. If there are more buyers than sellers, stocks go up. If there are more sellers than buyers, stocks go down.

It really is just that simple.

But it is because the basic stock market movements are so volatile and there’s so much noise, it’s easy to forget that very simple principle. And that is why most investors fail to ever make any money at all.

Most investors fail because they get caught buying what’s “hot” and in the news and completely passing over assets which have been forgotten, fallen out of favor, and aren’t attracting much attention.

The New York Times proves this point in Buying High and Selling Low:

$300 billion in new cash to equity funds in the bull market of 2002 to 2007 — with much of it put into funds when the market was near its highs. But in the ensuing bear market, investors pulled out more than $150 billion of assets — with the bulk of the withdrawals after the market melted down in September.

WHAT was the total cost of this poor timing? For stock mutual fund investors, it was more than $42 billion over the 12 months through May, according to a Hulbert Financial Digest study of data provided by Morningstar.

As we like to say in the Prosperity Dispatch, our free investment newsletter, some investors are doomed to fail. It almost seems like they want to buy stocks at highs and sell stocks at lows. Of course, every time they do it, they vow to never do it again. And then a few months later, they’re doing it all over again.

Contrarian investing, buying low and selling high, is one of the toughest things to do in the market. But it is also one of the only few ways to consistently make money in the stock market without having to take huge risks.