Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Jeff Saut: Buying the Flop, Beating the House


The rally is essentially over. The trick now: Keeping your gains.

Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.

In order to reduce decision-making anxiety, people often perceive things in ways that may or may not be logical.

Take this excerpt from The Journal of Personality and Social Psychology, for example:

"At 2 racetracks, interviewers questioned 69 horse players on their way to the $2 window and 72 others on their way from the window. The interviewers asked all bettors to rate their chances of winning on a scale of 1 to 10. The result was that the bettors returning from placing their bets had significantly more confidence in their choices than those interviewed before their bets were made. Thus, bettors facing doubts as to whether they had bet on the right horse relieved their tension by believing even more after the fact that they had done the right thing."

People talk the way they bet. From a stock-market perspective, this means that the interpretation of economic news varies in direct relationship to the investor's bullish, bearish, or cautious market position.

At the racetrack, if too many participants bet on the same horse, the odds on that horse go down, he becomes the favorite, and the potential payout is small. Popularity also reduces stock-market rewards: If a stock becomes a market favorite, its price is driven ever higher, and the upside potential is diminished. As Benjamin Graham writes, in The Intelligent Investor:

"The intelligent investor realizes that stocks become more risky, not less, as their prices rise - and less risky, not more, as their prices fall. The intelligent investor dreads a bull market, since it makes stocks more costly to buy. And conversely (so long as you keep enough cash on hand to meet your spending needs) you should welcome a bear market, since it puts stocks back on sale."

Graham goes on to note, "The value of any investment is, and always must be, a function of the price you pay for it." This viewpoint runs directly contrary to the Jeremy Siegel school of thought, which suggests that 7% annual returns over the long term are a "divine right." The main point: "Cognitive dissonance," once recognized, should probably be bet against.

To wit, when everybody bets on the same horse, stock, or market direction, it often pays to go against the crowd. While this has been termed "contrary-opinion investing," I use a much less elegant name for it: I call it "buying the flop." As Jim Rogers so wisely instructed us, we should buy panic and sell euphoria.
< Previous
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos