Whatever You’re Doing in the Market is Probably Wrong

Sorry, everyone, but Real Money Columnist Paul Price has a bit of tough love headed your way.

“The little guy,” he wrote recently, “is almost always wrong. When they yank money out of equities you should be doing the opposite.”

This is the start of one of the most classic pieces of investment advice, one which traces back to Warren Buffet himself. This wisdom advises that investors should trade counter-cyclically to the market. When everyone buys, it’s time to sell. When everyone sells, that’s the best time to buy.

This may be common wisdom but clichés are clichés for a reason. 

Here, many investors will follow the crowd. In some cases, their strategies are too short term. They count their profits in terms of days (if not hours) and have built portfolios that can’t wait until the market recovers its value or starts selling cheap. 

In other cases, investors simply act on emotion. They follow their fear or fear of missing out and often make worse trading decisions for it.

That’s especially true with retail investors. When markets take a sharp dip, many retail investors want to do something, anything, to protect their portfolios. Unfortunately, that often leads them to the worst of all worlds.

For example, “With just one trading day left, it was undeniable that stocks were likely to record their worst January since 2008,” Price wrote. “As of Jan. 27 about 44% of all Nasdaq stocks were off by at least 50% from their highs. That has rarely been the case in the 21st century.”

After all, “many of the ones that were beaten up, though, had never made money. Those deserved to be knocked down big-time from absurd valuations.”

Was there any good news to be seen? Yes.

The AAII (American Association of Individual Investors) sentiment survey at the time showed one of the widest spreads between bullish and bearish members since 2013.

“Why is that good news? The public is almost always wrong on their market timing. Extreme bearishness is thus a very positive contrary indicator.”

Indeed, in the following week, the S&P 500 surged about 6%, revisiting those levels a week later. (OK, there’s been an unprecedented geopolitical crisis, since then, but that’s doesn’t mean the indicator doesn’t work. In spite of several weeks of volatility, the index is now well above its January low).  

Taking the broad view, there are two takeaways here: First, rules notwithstanding, don’t invest in companies that don’t deserve your money. Just because the stock has a high profile or has entered a dip, that doesn’t always mean you should buy in. Look to see if they can answer simple questions like “can the company turn a profit.”

Second? Sometimes bad news can mean very good things. 

Please note: It is important to remember that you should not buy or sell a stock based on reading one article. Investors should do their homework. For more research and information, consider TheStreet Quant Ratings for a quantitative approach to stock selection. Or, get a daily dose of TheStreet’s smartest insights from its smartest analysts, delivered to your inbox daily via TheStreet Smarts.