Transcript:
Easan Arulanantham:
What is contrarian investing?
Tom Vaughan:
Oh, okay, let’s actually go back to this slide again, and we’ll share it in a way like this. So contrarian investing, when the fear is high you buy, right? Just think of that when the fear is high you buy. Now, the most amazing thing you’ll find is that the average person is doing exactly the opposite. Right? That’s it, it’s the difference between professional investors and average investors is that they have a high enough understanding of how these things work. They’re actually more interested in buying when things are falling than they are selling. So, you know, this is the buffer that I think we provide our advisors provide with our clients. You know, I know that there’s a lot of people out there, say you don’t need an advisor, you can go do all this stuff yourself. And that’s true in today’s world. But one of the things that does happen is oftentimes people on their own will panic. Whereas a professional manager, like us who’ve been doing it for over 35 years would look at that and say, okay, you know, this is the time to be actually buying right now. And maybe it is time to panic. But here’s why. And here’s the facts and the data and the research that goes behind that, where it’s time to pull back some of the stock pieces. I mean, that that can happen, too. But so, VIX is one measurement of fear. So when that gets above 3033, that’s a contrarian sign to buy, the fear is high buy. Here’s another one. This is the American investor, Sentiment Survey, American Association of individual investors AI. This comes out every Thursday. So it’s just came out yesterday. And you can see here, the bullish is 19.4, which is very, very low, if you go down below the historical average is actually 38%. So it’s half what it normally is. And what they’re asking is, very simply, do you believe the stock market is going to be higher in six months or not? But 58% think it’s going to be lower? That’s a pretty big number compared to again, 30% is almost twice as many people, of course, think it’s going to be bearish. Again, using this as a contrarian indicator, you can see this little dial right above us, it’s at negative 39. And so basically, greedy means the farther that gets over, the more you should be buying, if you’re a contrarian, and you’re coming in and buying when everybody’s leaving, you know, because the fear is getting high enough, versus fearful, which is where you know, everybody’s buying, and you’re starting to get nervous that you know, that’s gonna peter out, right? Because it does peter out either way, everybody sells and sells out. And pretty soon they’re done, right. And then only thing left are the buyers to come back in and move it over. And that’s essentially what the contrarian is relying on. And there’s one more measure here.
And this is, we just saw this today, this is the be of a bull and bear indicator, this is a proprietary indicator that they have, but I would assume it’s a basket of different contrarian indicators that they’re looking at. It’s extreme, it actually went from point to this chart to zero. And so really, people are super, super bearish right now. I mean, and again, what that means is, theoretically, that all of these people have made their moves they’ve sold and sold and sold. And that leaves the few buyers that are still out there, that contrarians that are coming back in and buying that dip. And they might have an outsized impact on the market, because there’s nobody on the other side anymore. And so, pretty soon, there’s a lot more buyers and sellers, right? And so that’s, that’s what that’s talking about when they talk about being a contrarian. It’s coming in. And long term, this is a really good strategy. And so some of the best investors in the world, Warren Buffett’s been buying recently, right? You know, Mark Tobias, with with Franklin Templeton, you know, there, there are people that are really, really good. I mean, again, they’re walking in the door when everybody’s running out. And so that that’s, that’s where we’re at right now. Now, you have to be a little bit careful, because your situation might be different. You know, what’s the timeline you need this money for? Because think could continue to do poorly for a while. I’m gonna buy a house at the end of the year. Well, you should not be walking in when everybody runs out. You probably shouldn’t be in there in the first place. Right? That’s too short of a goal. I see that all the time, by the way. And so, you know, that type of thing. Hey, I’m 40 years old. I’m going to retire at 65 I hope I’m gonna live to 91 Okay, you can suffer And last, and you can keep buying those dips, you know, be brave, you know, all the way through because, heck, even the Great Depression came back in 14 years. And so there’s a chance that you’re going to come back in your lifetime, even probably before your retirement. So your age, your Outlook, you know, your risk tolerance, what’s your cash flow situations? Like? How much money do you have on the side that you could live off of, if the market didn’t do well, for a while, will really determine how much of a contrarian you can be? You have to be careful.
Easan Arulanantham:
Yeah, and the market has never gone to zero. And so it’s, if you, but you also want to take some kind of, you know, is this within my risk tolerance? Because if you’re not, if you take on too much risk, and you stop sleeping at night, and you’re looking at the market constantly and seeing red, and it’s giving you anxiety, then this is not a strategy for you, right? So there has to be a balance between what you can handle what you can stomach?
Tom Vaughan:
Well, one other key component here that we didn’t talk about was just what are you buying? Okay, so you got, everybody’s running away from this little company that doesn’t have any earnings, barely has any revenues, and you’re running in the door on that, that’s a totally different deal. Than, hey, everybody’s running out of the S&P 500. And you’re walking in and buying the S&P 500. Because that little company can go out of business. We’ve seen a lot of them go out of business. And so you know, if you’re going to do that at least buy a basket, a little companies, maybe an ETF, Russell 2000, or something, you know, if that’s really what you want to do, if you’re going to do the little company thing, make it small, you know, because if it works, you’ll make money, you know, but there is there’s a contrarian thing where you’re just running off of a cliff, that just there is no bottom, it goes to zero, and your portfolio goes with it. So that I do think that needs to be understood. You know, when we’re talking about controlling investing, you have to be a little bit careful about what you’re getting into. As far as that goes.
Easan Arulanantham:
Yeah. And like Warren Buffett, he tends to buy quality companies that are down kind of on like the down in their cycle. Yeah. And so he’s not buying companies, small companies, he’s buying, you know, Coca Cola, he’s buying all the big companies, and he feels there’s value to be had by when they rebound back up.
Tom Vaughan:
Yeah, exactly. I mean, I always tell the story about Ping google.com, you know, 2019 99 whatever it was client calls up once to buy bingo.com You know, so when I look it up, it went from $1 to $9. Like overnight, six months, huge rate of return. This was you know, the the.com bubble, no doubt. And so, I look into it, it it doesn’t have the ability to do they never got approval to do bingo online, but that’s what they’re trying to do. They just filed a public offering. And so then it started to fall, you know, it had come down to like $8 and this client was excited. Oh, well, you know, did so well made some money, you know, online, you know, bingo is going to be hot because bingo, it is popular, right? But they never had approval. So then they have a company that have no revenue, no earnings, no, nothing that didn’t have approval. So trying to buy that on the way down, it went to zero. E toys, right? Big big runner went to zero. So you got to be careful on some of these stocks. You know, you’re running into something. So keep those bets fairly small in my opinion. Nothing wrong with making those bets. It’s kind of fun, but keep them smaller.