I have pretty much always been a contrarian investor, meaning that I invest against the crowd. I believe that commodities tend to get extremely over-valued and under-valued, and I don’t like to purchase any investment for more than its worth.
As you can read in my “about” page, I currently invest in ETF funds that tend to mimic sectors of the market which I believe are undervalued by the market. I used to invest in individual company stocks, but now that I’m starting a family I have adjusted my risk tolerance accordingly.
For the most part, this “undervalued” usually translates, in simple terms, to a a stock or ETF that is trending down in price. I believe the market to be extremely and obtusely emotional and that it tends to over-extend its trend in pricing on various commodities and therefore their respective sectors.
I also believe that, thanks to online self-investing platforms (i.e. Ameritrade, Etrade, Scottrade, etc.), that the amount of investors that have the ability to easily “short” sell a stock, and are doing so, is growing rapidly. These growing number of “day traders” act to help exaggerate already overly pronounced swings to the down side that create prices on commodities that are extremely undervalued. I tend to purchase these discounted commodities.
It is very difficult to be a contrarian investor, for as you are purchasing against the short term market trend, you will have that sinking “wrong” feeling for some time, with the commodity continuing to fall after you’ve invested. I understand and live with this, because I don’t believe anyone can call the bottom in a stock or sector on an accurate and regular basis. Thus, I use a proprietary technique that I’ve developed over my years of investing where I start to purchase when I believe the stock/sector is already extremely undervalued. Then I continue to purchasing in larger and larger quantities as the investment becomes more and more discounted.
To keep my sanity, I only put money into the market that I won’t need for at least 10 years. My investments are future, long-term focused. I am not a day-trader and I understand that I am purchasing something that is out of favor and may be for some time. For me, this helps take a lot of the short term emotion out of worrying about the price as it drops.
My belief is that if I am pragmatic in my assessment of an undervalued sector and start purchasing at a point where I already think the sector is quite undervalued and it goes down far beyond that, I will be purchasing the majority of my allocated investment money into an extremely undervalued situation, and in the long run, I will receive outstanding returns.
Market sectors are very cyclical. They go up and they go down. One sector becomes the big rage, due to the appearance of the big current global or national situation. Often the news drives a sector higher. Since there’s only so much money, for the raging sector to go up in value, the money has to come from elsewhere, part of which is other sectors and those “out of favor” sectors become temporarily undervalued. For me, this is the time to buy into those sectors as they are selling at a discount.
In the short term I tend to lose value as I build my investment into the sector, but long term I am almost always right. I rarely sell a commodity for an overall loss, and on those few occasions that I have, I almost always regretted it as I ended up missing our on very good gains when the stock did finally take off towards the overly exaggerated “up side”.
When I follow my own investing techniques and don’t allow my self to deviate due to emotional responses, my worst case scenario is usually that I sold too soon, for not enough profit.