Sir John Templeton once said “To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit.”
It’s Sunday and the European debt issues are once again all over the news. I plan on keeping the aforementioned in mind should volatility continue. I hope you do too.
“The logic of crowd error is clear and almost mathematical:
*Markets swing dramatically, from bullish to bearish and from overpriced to underpriced.
*Their movements are driven by the actions of “the crowd”, “the herd” or “most people.” Bull markets occur because more people want to buy than sell, or the buyers are more highly motivated than the sellers. The market rises as people switch from being sellers to being buyers, and as buyers become even more motivated and the sellers less so. (If buyers didn’t predominate, the market wouldn’t be rising.)
*Market extremes represent inflection points. These occur when bullishness or bearishness reaches a maximum. Figuratively speaking, a top occurs when the last person who will become a buyer does so. Since every buyer has joined the bullish herd by the time the top is reached, bullishness can go no further and the market is as high as it can go. Buying or holding is dangerous.
*Since there’s no one left to turn bullish, the market stops going up. And if on the next day one person switches from buyer to seller, it will start to go down.
*So at the extremes, which are created by what “most people” believe, most people are wrong.
*Therefore, the key to investment success has to lie in doing the opposite: in diverging from the crowd. Those who recognize the errors that others make may profit enormously through contrarianisim.” ~Howard Marks
Currently reading: The Most Important Thing – Uncommon Sense for the Thoughtful Investor by Howard Marks
Note: These opinions are for general information only and are not intended to provide specific advice or recommendations to any individual. No strategy assures success or protects against loss.
Until next week,