How to Ditch the ‘Herd’ and Beat the Market

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 in the words of Michael Lewis, bestselling author of Liar’s Poker and The Big Short and a former bond salesman for Salomon Brothers, “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.

Even when a contrarian opinion will work, few traders have the courage to act on it. 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.”

The same is true when things are going well… When stocks keep hitting new highs, I always hear from folks who are ready to go all-in.

Take a minute to seriously think if you have a contrarian mindset or not… Were you eager to buy stocks when they were trading for a mere 12 times earnings in 2009? And were you brave enough to buy beaten-down tech names after the tech bubble burst? You could have scooped up quality companies like Microsoft (MSFT) for $20 a share or Amazon (AMZN) for just $7 a share.

Certainly, a few people did it. If you were one of them, good for you – you’ve earned your contrarian badge. And you’ve probably made a boatload of money.

You see, being a contrarian is hard. As humans, we tend to adopt a “herd mentality” – which is where we are drawn to think and act in the same way as the majority around us.

In our current strange world, it’s even harder to know what you should do with your money. You might be wondering whether stocks will keep going up as things start to return to some version of “normal”… or if euphoria in the markets over the past year will lead us close to bubble territory.

If you’re asking these questions, I hope you attend a briefing we’re holding next week.

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Q: Thanks for all the very helpful articles you have published!

Recent topics have covered asset allocation, how much to invest in stocks vs. bonds vs. cash, etc. When you discuss bonds, are you usually referring to U.S. Treasury notes unless specifically mentioning corporate bonds?

When you discuss bonds, are you ever referring to bond funds, or are you always talking about holding individual bonds, like buying from TreasuryDirect.gov? What are the downsides or upsides of investing in bonds through an ETF or similar fund vehicle, and how might that affect your recent advice about selling bonds dated longer than two years? Warm regards. – C.P.

A: We’ve always said that adding safe fixed-income investments to your portfolio is a simple way of stabilizing your investment returns and guaranteeing wealth without worry. Knowing you will get a check from the government or a company before anyone else is a great feeling.

When we talk generally about bonds, we mean all types of bonds… those issued by the U.S. Treasury, municipal governments, and corporations alike. And that could be in the form of individual bonds or in funds.

I do like investing in bond-focused funds – like municipal-bond funds, closed-end funds, or exchange-traded funds. With these investments, we’re pooling our money with other investors and minimizing the risk from any one or two bad investments. Since each fund holds dozens of individual bonds, we’re instantly diversified. If one bond defaults, we’ve got the safety of the others to keep our value and income relatively constant.

With that said, if you’re buying into a bond fund that gives you exposure to bonds with maturities of five, 10, even 20 years, your returns will likely suffer because interest rates are currently so low. That’s why I recommended that you reconsider your positions – whether in bond funds or individual bonds – in long-dated bonds.

Q: I have a quick question. We are using avocado oil and wonder if it’s as good as extra-virgin olive oil. Thanks for your Q and As! – F.J.S.

A: That’s a great question. We like olive oil because it has many more scientific studies behind it than avocado oil. That said, avocado oil does have a good profile of healthy fats similar to olive oil. And it has a high smoke point, meaning it’s better for cooking at higher temperatures (think frying and sautéing).

So our problem really is a lack of well-researched studies… There are two studies we found suggesting avocado oil may change how our livers function, which could lead to fatty liver disease. And there’s a lone Indian study suggesting some avocado exposure might change the DNA in our lymph cells (yikes!). And it’s important to remember, some of the beneficial studies receive funding from “Big Avocado” – the Hass Avocado Board. That doesn’t necessarily mean there aren’t any benefits, but it’s something to keep in mind.

Another big deterrent for avocado oil – the price. It’s much more expensive than olive oil despite similar proven health benefits.

If you want to use avocado oil, we’d suggest only using it for high-heat cooking. Stick to olive oil for everything else. And no matter which oil you prefer, remember to avoid processed oils – anything that says “partially hydrogenated.” That’s a sure way to ruin your health.

What We’re Reading…

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig and the Health & Wealth Bulletin Research Team
March 26, 2021