Behavioral studies in finance are a fascinating subject that attempt to prove how irrational we as humans can be, and how those traits carry over to the world of investing. At Pinnacle we try to use this valuable information to be contrarian investors at times. A contrarian by definition is a person who invests contrary, or opposite, to popular opinion when crowd behavior moves market prices to extremes, either too high or too low. As investors stampede into or out of different “hot” investments, the market often catches the masses off guard by making sudden, violent moves in the opposite direction (Tech stocks in 2000 are the most glaring example). This week, we have picked up on a few signals that have raised our contrary antenna.
Barron’s Magazine is a respectable journal in the finance community, but nevertheless they are still a part of the media and are subject to over exuberance at times. On October 12th, the magazine ran a story about the salvation of Bill Miller, the famous mutual fund manager who struggled mightily the past few years, titled “It’s Miller Time.” The article explains that the Legg Mason Value Trust Fund managed by Mr. Miller is “up a whopping 37.52% so far this year, putting it in the fifth percentile of all large blended-fund returns.” First, congratulations to him on the big rebound, but come on, “It’s Miller Time?” His fund cratered by -72% from the top of the market in October 2007 to the bottom in March, which was much worse than the S&P 500’s frightening -55% plunge. That means his fund is still down 45% from the market top! If that’s “Miller Time,” then I’ll be reaching for the Silver Bullet.
We switched TV stations in our office from CNBC (disparagingly referred to as “Bubblevision” by some critics) to Bloomberg, coincidently right at the March lows. However, yesterday even Bloomberg surprisingly paraded the Dow 10,000 hats normally reserved for Bubblevision. We hear the argument that 10,000 is a very important psychological level, but more and more people seem to be partying like it’s 1999. CNN has an article this morning titled “Stocks look beyond Dow 10,000.” With bullish excitement building, it would not be surprising to see a short-term market peak sometime soon. And then it will be time to see if the fundamentals justify this run, or if it is time to become a contrarian and head for the exits in the face of the rapidly growing enthusiasm.
