Contrarian Investing

October 7, 2011by Hoy Grimm0

“I try to be greedy when others are fearful and fearful when others are greedy, “  – Warren Buffet

The premise behind this oft quoted axiom of greed and fear is the notion that a majority of investors allow their emotions to exert undue influence in their investment decisions. The implication is important because out of all of the factors involved in becoming as successful as MR Buffet, mastering your emotions should be one of the easiest to duplicate.

A quick glance at the business headlines reveals a myriad of fearful plot lines. Europe continues to simmer nearing a boiling point. They have little time to choose between painful austerity measures for Greece, or continued bailouts from wealthier nations in Northern Europe (Germany). The US economy has clearly decelerated in the past few months. We outlined the early warning signs for readers in our June column and posited then that a reduction of risk was warranted.  While we don’t do victory laps at LeConte we do share our process in an effort to help you define yours.

If you followed the warning signs in June and July when most everyone was gleefully looking for economic acceleration and increased your cash position, you now have an opportunity to capitalize on the inordinately high levels of fear in the markets. It looks like many investors are letting their emotions dictate poor selling decisions. If you can master your emotions and focus on the hard data you may find some timely opportunities to put your cash to work.

Today, September 27th, 2011, Ten year US Treasury Notes returned less than 2% in interest which is less than the indicated dividend yield on the S&P 500 stock index (~2.5%). While corporate earnings may be manipulated by accounting sleight of hand, dividends are real, spendable evidence of a company’s profitability.  This yield divergence has only occurred 20 times in the past 58 years it isn’t a common event. By this measure the market looks cheap and bonds look expensive. We track a number of other indicators and most of them measure a higher level of fear from investors than the facts warrant. Successful investing requires a plan that can instill the courage to focus on the financial opportunity and ignore the gory headlines. That is the artful aspect of buying low that we strive for in our process at Leconte Wealth Management.

Hoy Grimm

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