If you were in the trenches, you could have seen the mortgage crisis coming years away...
My senior analyst, Matt Weinschenk, was working at a title insurance company while the housing boom was in full swing in 2005. It was his first job straight out of college and the company was hiring folks like him in droves.
I'll let him tell it in his own words...
The entire building was full of recent grads like me (Matt)... except for Buddy.
We were crammed together – desks inches apart, two people per cubicle – because the market was so hot. Each team worked with a single bank on title insurance. Essentially, we made sure that all the mortgage documents were legitimate, and then arranged the signing.
My bank wrote decent mortgages, but I'd hear warnings about the others... "Don't get switched to that bank. Every one of their borrowers has three judgments and five delinquent accounts." That's a lot of extra work for the title agent. And we were busy enough as it was...
I remember one day when the management team held a rally in the building's big, open entry. The VPs went on about record numbers and year-over-year growth to mild applause.
But Buddy saw what was coming...
Buddy had worked in title insurance for decades. When you hit a problem that wasn't covered in the half-day of training, you asked Buddy how to fix it.
As I was lingering in the back of the rally near him, he laughed and said, "These idiots. They're patting themselves on the back like they did something special. Everyone is growing like this. And it's not going to last long."
Buddy was absolutely right...
Within two months, four other guys and I had an entire two floors to ourselves. The company went from a billion-plus market cap to bankrupt.
This real-world education was an invaluable addition to my economics degree.
First, this was only 2006... The stock market wouldn't peak for another year. It was clear evidence that if you know where to look, you can find signs of big things happening long before they spill over into the market.
Second, when the consensus opinion is clearly going one way... check for the holes. Buddy wasn't a constant critic or knee-jerk contrarian, but when you feel the mania set in, the run is just about over.
Being contrarian pays when you're an investor. If nobody wants an asset, you can buy it cheap. If everybody wants it, it's expensive. But as Michael Lewis, bestselling author of Liar's Poker and The Big Shortand a former bond salesman for Salomon Brothers, puts it, "On Wall Street everybody says he's a contrarian, and nobody is."
Investors love to follow the herd. And most of the time, "fighting the trend" is difficult at best. If you immediately take the opposite side every time a stock gets overvalued or a sector looks oversold, you're going to go bust very quickly.
Then, at the times when a contrarian opinion will work, most don't have the courage to make the trade. Every investor professes a contrarian streak, but when watching a dropping market, they often say, "I know you're supposed to be greedy when others are fearful... but things are pretty scary right now."
In a recent issue of my Income Intelligence newsletter, I told readers about the three rules for contrarian investing and where I'm seeing a contrarian opportunity today...
- Did you miss it? Even a crystal ball is worthless in this strange market.
- Something different: Want a road trip idea? Here are the 50 longest highways in America.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
June 6, 2018