Baron Rothschild, a 19th-century British financier and member of the Rothschild banking family, is credited with saying that "the time to buy is when there's blood in the streets." Now, whether he said those words is not proven, however the concept of contrarian investing has lived on. Warren Buffet is the most famous for many quotes and this one further simplifies Mr. Rothschild’s, “Be fearful when others are greedy and greedy when others are fearful.”
So, what is contrarian investing? It is the belief that the worse things seem, the better the opportunities are for longer-term profit. Is this concept only relatable to equity markets? No. I believe you can attach any asset into this concept and over time (with patience and discipline) have a high probability of greater wealth creation.
For example, housing during the Great Recession of 2007-2009. Those who were able to purchase home(s) during the height of the foreclosures - when fear was running wild – were able to build tremendous wealth over the last thirteen years.
How about today? What is the level of fear or consumer sentiment?
According to J.P. Morgan, “The first half of 2022 has been very disappointing with the Omicron variant prolonging the pandemic, sharply rising inflation and interest rates, falling stock prices and the shock of Russia’s brutal invasion of Ukraine. These factors, combined with a still very partisan political environment, have driven consumer sentiment down to its lowest level on record.”
Below, the graph shows consumer sentiment over the past 50 years with 8 distinct peaks and troughs and how much the S&P 500 gained or lost in the 12 months following. On average, buying at a confidence peak returned 4.1% while buying at a trough (low) returned 24.9%.
If you believe that this is a market timing device, you need to stop here and re-read the article as you have not grasped the point being proposed. This does not mean that the S&P 500 will return 24.9% over the next year. I have no idea what the short run will bring – nor does anyone else if they are truthful.
My point is simply that – in my experience, doing what others are not - provides a greater probability of long-term wealth creation, with history as a guide, as opposed to running with the herd during either euphoric or panic driven events. Furthermore, it may feel bad at the time, but as the saying goes…you make most of your money in bear markets, you just don’t realize it at the time.
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Consumer Sentiment Index – JP Morgan Guide to the Markets June 30, 2022