By: Dividend Sensei
Recency bias also works in reverse. When stocks fall far enough, then even the so called “smart money” including Wall Street’s highly paid fund managers, can end up selling. Valuations be darned the price will keep falling! Buffett actually saw this in the the 1973 to 1974 stock market crash. Buffett told his biographer Alice Schroeder that in 1974, just months before the bottom was reached, he would talk with fund managers. He pointed out that quality blue chip companies were trading at fire sale prices, sometimes just four to five times cash flow.
“I know they’re cheap, but it doesn’t matter. Because all of my colleagues will be selling anyway, because people are panicked and selling everything” is the general reply he got. In other words, just as these same fund managers were willing to buy the “nifty fifty” (the FAANG stocks of their day) in the 1960’s at any price because the share prices were sure to go up, a few years later they were willing to sell quality companies at precisely the time they should have been buying with both hands. Of course if a fund’s clients are demanding their money back, then a fund has no choice but to sell. But that’s precisely why contrarian value investors, who invest for the long-term, have an edge over Wall Streets so called “pros”.
Like the German speculative retiree who knows that they are buying into a penny stock pump and dump scam, these fund managers just can’t help themselves. Their careers and the Wall Street actively managed asset business model is built around giving individual investors what they want. And because those investors are human, with built in psychological principles that lead them to herd mentality both in times of boom, and bust, fund managers largely have their hands tied.
But this also means that contrarian value retail investors (like us), have an opportunity to benefit off the inevitable foolishness of the market’s wild gyrations. Of course since we’re all human, this is easier said than done. I myself am a diehard contrarian value investor, and I’ve been buying into the REIT bear market with both hands for six months now. Thus far the slide hasn’t ended, and I’ve been taking a beating while the overheated S&P 500 has risen ever higher. And I’ll admit that it isn’t fun to see everyone around you make money while your unrealized losses mount.
But as a professional investment writer, and a student of market history, I also know that the best time to buy quality dividend stocks is when things seem darkest and the market hates them most. That’s why REITs (as a sector) are now at their most undervalued levels since 2009. In fact, historically when REITs are this cheap, they tend to rocket up 20+% in the next 12 months. Is it easy to ignore my human emotions? The fear that losses will continue like this forever? That it wouldn’t be better to just sell now (before REITs fall further) and buy into the strong market rally into hot stocks that are on fire (Amazon is up over 60% in 6 months)? Of course it’s not. Then again if long-term contrarian value investing were easy then everyone would do it and the strategy would stop working.