BEING A CONTRARIAN IS TOUGH

By Vadim Pokhlebkin Tue, 25 Aug 2009 15:45:00 ET

Raise your hand if you agree with this famous quote from Baron Rothschild, an 18^th century British banker and a member of one of the world's richest families:

 

"The time to buy is when there's blood in the streets." 

 

Good advice, no argument there. OK -- now, how about this adage:

 

"Buy low, sell high."

 

Again, you'd be hard-pressed to find an investor who disagrees. Then why in the world do so few investors actually follow these rules?

 

In October 2007, when the DJIA topped 14,000 -- how many sold their shares? And when stocks scraped the bottom below 6,500 in early March of this year -- how many called their broker and yelled, "Buy, buy, buy!"?

 

It's no stretch to say that in each case, only a small minority of investors acted. The rest waited. At the 2007 top, paralyzed by greed, they waited for "the Dow at 40,000." At the March lows, they waited paralyzed by fear and hope. In both cases, the eternal cycle of greed and fear did what it always does: It transferred money from weak hands to the strong ones.

 

Harsh? Yes. But that's just how the market works. Despite a common misconception, it's not a place where everyone gets rich quick.

 

I will go one step further and suggest that even those gutsy investors who bought at the March lows are hesitating to sell now that the DJIA is almost 50% higher -- thus fulfilling only one part of the "buy low, sell high" adage.

 

Why is it so? The Elliott Wave Principle explains it best: investors herd. Human beings perceive safety in numbers -- and it's very, very hard to break away from the crowd, whether at market tops or bottoms. Being a contrarian is not for the faint-hearted.

 

Still, some manage to do it. Baron Rothschild bought when everyone sold. Sir John Templeton (look up his investment philosophy if you don't know it) sold tech stocks in 2000, and as early as 2004 warned (along with Elliott Wave International's president Robert Prechter) of the real estate bubble, also saying it was "a dangerous time to own stocks."

 

How do these investors do it? Well, some simply have both the uncommon intuition for extremes in crowd psychology and the guts to act while others wait. Others, like Bob Prechter, have a method -- a contrarian method like Elliott wave analysis.

 

The DJIA is up BIG from its March lows. Do you know how much longer the rally may last? Will you know when to sell? Our Financial Forecast Service can give you forecasts on multiple time frames right now. Try some contrarian thinking for a change. (Risk-free, as always.)

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