Contrary Opinion and the Fear Factor

The following is an essay I submitted to the website Market Oracle UK:

Contrary Opinion and the Fear Factor


By Wink Twyman



Last week, I turned on CNBC in the early morning hours. Anchor Sue Herera was in a bubbly mood. She said that, after the market’s performance that week, one commentator said, “You ain’t seen nothing yet!” Because I am jaded on media coverage, I immediately took Herera’s cheerleading as a signal that the top was close at hand. It occurred to me that the average investor and trader might take Herera’s words to heart, rush out to Scottrade or Charles Schwab, and plunk down their hard-earned money on “black,” I mean, the stock of their choice because the market was now safe.

The purpose of this essay is to show that it is never safe when commentators say, “You ain’t seen nothing yet!” In fact, this is often the worst possible time to buy stocks. Never buy giddiness or veiled hints that the best is yet to come. Oftentimes, while you are buying stage right, the pros are selling stage left.

The famous trader, Jesse Livermore, remarked that he was often tasked with the job of marking up stocks for sale to the retail public. The public never seemed interested in low prices. But once a stock started to move, the level of interest from amateurs would increase proportionately. It was understood behind the scenes that the insiders were already in. They were using the increase in prices to scale out of their positions. Now, the oddest point Livermore noticed was that the retail public would continue to buy on the way down! Apparently, hope springs external. The average guy would always hope that the next drop down was support and that this support would hold. Of course, there is no such thing as support in a Bear Market.

Livermore never knew CNBC. He died in the 1940s. But he would have recognized the game that was going on last week. Some things are timeless.

Nicholas Darvas was a Las Vegas dancer who stumbled into investing and trading during the 1950s. I love the Darvas story because he had the persistence and determination to figure out the system on his own. Darvas candidly wrote about his early days when he sought out stock tips and “financial advice sheets.” The commentators were always excited about the market. They urged readers to “Buy this stock now before it is too late!” And guess what? Darvas would rush out to buy the recommended stocks. The stocks took that as a signal to drift lower and lower. The pattern never changed. Eventually, Darvas woke up and opened his eyes. He realized that “when these financial tipsters advise the small operator to buy a stock, those professionals who have bought the stock much earlier on inside information are selling.”

It did not pay to be late to the party.

Gary Smith is another example of an average guy who read the papers and treaded water. For years, Smith wanted to succeed as a trader more than anything in the world. He worked tirelessly. He read The Wall Street Journal. He read Barron’s. He was influenced by the news of the moment. And still he went nowhere as a trader for sixteen years. It was only when he discovered contrary opinion did he turn himself around as a trader. Learning to ignore The Wall Street Journal, for example, was his saving grace.

These are just a few examples of contrary opinion. There are many, many stories out there in the wild and woolly world of financial markets. The take away point is that buying should be at a point of fear, not warm and fuzzy feelings or the urgings of commentators.

Consider that one of the best times to buy the S&P 500 Index this year was August 25, 2010. On that date, I urged my fellow investors in the Las Vegas Thrift Savings Plan (TSP) to move 100% of their retirement funds from the G Fund (essentially a cash position) to the C Fund (a diversified portfolio of stocks). I remember that day well. There was no giddiness from Herera on CNBC. No media commentators were crowing that “You ain’t seen nothing yet!” During my lunch stroll along the harbor, I saw the newspaper headlines proclaiming that the stock market had suffered a series of setbacks. When I saw that bearish headline, I knew my call to move 100% into stocks was the right call.

What were retail investors and traders worried about during the last week in August? They were worried about a developing Head and Shoulders pattern on the Index, (on no!), the Hindenburg Omen (oh dear!), and the Grand Cardinal Cross (oh my!). Most of all, there was fear in the air. Even I was fearful on the morning of August 27 as the S&P 500 Index dipped below 1040 and I was Bullish!!!

Ultimately, it is always a good time to buy when the fear factor has gripped the hearts and minds of Bulls, Bears, and the “Get Me the Hell Out of Dodge” Crowd. That’s how money is made. That’s how winning is done. Buy the fear.

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