While you might have heard of many winning approaches, this one is not too complicated.

Put it simple: Go against the crowds.

Explanation: when the crowds say sell or not buy, consider about buying; when the crowds say buy or not sell, consider about selling.

This applies to many types of investments: stock market, real-estate, industry sectors (ETFs), or commodities.

As an example, in early 2000s, gold had been long out of favor as an investment vehicle, for about 2 decades. No one wanted to buy gold. Then it went from $250 to $1800 in 10 years. In 2011, everyone wanted to buy gold, then it went down from $1800 to $1100 in 5 years. Price chart

Another example, around 2004 and 2005, everyone I talked to in or out of China told me not to buy Chinese stocks. Many cited painful experiences. The market had gone from 2200 in mid 2001 to 1000 in mid 2005. But then it wen to 6000 by end of 2007. There, everyone jumped in the stock market. Then the market crashed to 1700 by end of 2008. Price chart

Now, who are the “crowds”, or who is the “everyone”?

This should include all the ordinary people around you: your cousins, neighbors, colleagues, housemaids, taxi drivers; many in the media, on the internet. Note the emphasis here is everyone, or many of them. Or, if you hear from only a small number of people, pay attention to their enthusiasm. So when you hear an expert interviewed on CNBC touting gold going to $5000 soon, it should be taken as a signal to sell.

And don’t exclude the investment community. If George Soros tells you in private that you should buy gold (of course, in that case, you wouldn’t need to read this article, as he should have already taught you about this), you probably wouldn’t treat it as a sell signal, but you shouldn’t believe it bluntly, instead you should do your research on it. On the other hand, if many of crowds in the investment community are excited about something, take that as a contrary signal.

Wall Street is often dumb (by saying this, do I mean that I am smarter than all of them, you would wonder? Of course not! Just as any one of the smart people on Wall Street is not smarter than the rest, but there are cases where some can be smarter than the others). As an example, toward the end of 2019 when Corona virus broke out in China and the city of Wuhan (with 10 million people) was later locked down, an unprecedented event in modern history, the S&P still moved up. Wall Street ignored that 1) China was a major player in the world economy, and 2) the virus might soon spread out to the world. Everyone was shouting buy. By mid Feb 2020, S&P 500 reached a high of 3400. Then there was the news that the virus spread to the US, and the S&P 500 crashed down to 2300 by mid March. Everyone was shouting sell. Then guess what, it climbed to 4700 by end of 2021. Price chart

What about timing?

Say in the case of gold out of favor in 2 decades, if one bought it in the 90’s, then it sat there for a decade without much gain, so you would protest this approach.

So if everyone doesn’t buy something, it does not make a determining factor for you to buy it right away. But it tells you that this can be an excellent opportunity and you should keep a good eye and a good ear on it. So you should watch for any confirmation signals.

Actually, didn’t you notice, when no one has been interested in something for some time, that something is not easy to find as no one talks about it (if you find it, then good for you). Most likely case for one to come across such a thing is when some few people start talking about it and you find it being out of favor for long and now the price has been up somewhat. So that’s about the buy time, though you should do some research.

On the other hand, when everyone talks about buying or selling, the price can go the opposite direction sooner, so it’s about the time to act, though you should do your research. For instance, I heard someone touting their investments in bitcoin in March of 2021, see the Price chart.

Can I buy stocks with this approach?

While this approach works better on most investment vehicles, it helps only to certain extent for individual stocks, as a stock in a developed market is more influenced by what and how the business is doing, and in an emerging market is more influenced by the speculation forces behind. Take the case of Eastman Kodak, its stock was depressed as not many wanted to buy it when digital camera got popular, so eventually, the company went bankrupt. In Apple’s case, when its computers couldn’t compete well with the WinTel ones, its stock was very depressed for long also as not many people wanted to buy it until Steve Jobs resurrected it with a different strategy. So in the case of individual stocks, you need to pay more attention to other factors aside from using this approach.

Why does it work at all?

There are strong reasons behind this, which will fill a future post.

Cheers! Santé! Prost!