It’s sure been an exceptionally-ugly week in the US stock markets! The threat of Washington defaulting on its debt, worse-than-expected economic data, and the waning of Q2 earnings season conspired to wallop equity prices. The resulting sharp selloff has led to soaring anxiety and fear, traders are rushing for the exits. But these scary conditions are a contrarian’s dream, an ideal time to snatch up bargains.
Legendary investor Warren Buffett is a bottomless font of fantastic investing wisdom. One of my favorite quotes from him is "Be brave when others are afraid, and afraid when others are brave." This simple concept is the core foundation of all contrarian speculation and investment. If you want to buy low and sell high, the best time to buy low is when everyone else is scared. It is their collective selling that drives stocks to deeply-oversold bargain prices.
And with the flagship S&P 500 stock index (SPX) plunging 6.8% in just 7 trading days by Tuesday, naturally the majority of traders are afraid now. They are selling with reckless abandon, fretting about Washington’s out-of-control spending, European sovereign debt, poor economic data, and all kinds of other things. Thus stock prices in popular sectors from technology to commodities have been crushed.
Our natural instinct during such carnage is to join the frightened herd in racing to dump stocks. The great majority of traders lapse into this groupthink behavior, being afraid when others are afraid. But for the contrarians who’ve trained and hardened themselves to fight the crowd, intense selloffs are harbingers of great opportunities. Aggressively buying stocks in their fear-filled hearts nearly always leads to huge profits within a matter of months.
I’ve been a contrarian speculator and investor for decades, so I’ve experienced countless times how challenging it is to be brave when others are afraid. Buying into a fear maelstrom is never easy, as there are always endless reasons advanced why stocks ought to imminently plunge much lower. But this strategy’s fruits are wildly profitable.
The key to fighting the fear in your own heart, to forcing yourself to buy when everyone else is selling, is perspective. The tyranny of the present hugely distorts our worldview, we all want to extrapolate current events (in the markets or life in general) as persisting out into infinity. But just when things seem least likely to change is right when a major change is probably coming. Charts really illustrate this in the markets.