Today’s Rum Rebellion is going to be a good one. Maybe the most important one I’ve written so far.
That’s because I’m going to reveal the single most important thing that an investor needs to do to be successful.
It’s not rocket science. In fact, it’s very simple.
But most people either don’t even consider it, or can’t consistently do it, even if they know what it is.
The biggest investing ‘secret’
The biggest investing ‘secret’ that I know of is this: Don’t have an opinion. It’s as simple, and as infuriating, as that.
What do I mean?
Well, most investors, especially part-time or DIY investors, want ‘inside info’, or a hot tip. This might be you. That is, you want to know what some expert or analyst thinks, or you want to listen to a bullish presentation by the CEO.
You want a reason to buy a stock, a reason that doesn’t put the sole responsibility for the pick on you alone. Mostly this is done out of ignorance. After all, you’re not an expert. There could be something you’re missing that you don’t realise. So you need some reassurance.
This is completely understandable.
Even if you don’t crave this type of information, you might suffer from the opposite affliction. That is, you are strongly wedded to your own opinions and don’t give credit to anyone else’s.
As a result, you soak up information that reinforces your opinion, and discard information that challenges it.
It’s called confirmation bias. And it’s not good.
If either of these things sound familiar to you, listen up:
Ignore opinions! Yours, mine, your friends, the experts…whatever.
In investing, ignorance really is bliss sometimes. Because our opinions trap us into making — or not making — very important decisions.
And often, our opinions are wrong.
Now, I’m not saying you should invest with the use of a dartboard as an alternative.
But what many people don’t realise is that there is an opinion on offer — everyday — that is far smarter than you, me, or anyone else out there.
That’s the opinion of the market.
The market is the collective wisdom of everyone. Sure, it gets it wrong at some points, when euphoria or pessimism take over. But for the most part, the market is smarter than all of us. That’s why it’s so hard to ‘beat’ it.
Take the housing market as an example. Nearly everyone has an opinion on housing. It’s too expensive, it’s going to bust, there’s too much debt, etc. But now, it seems, the housing market has turned.
Who would’ve thought!
Listen to the market
The market knew though. The initial signs were apparent at the end of last year. More evidence surfaced at the start of 2019.
In March, I recommended a stock for subscribers of Crisis & Opportunity. It was a stock exposed to the housing cycle, and I justified the recommendation by saying that the housing market had turned.
I showed the chart below and said:
‘Note that the banks peaked back in early May 2017. From the peak to the low in December 2018, the index lost 26% of its value. That’s a big decline. It suggests most of the bad news…was reflected in the price in late 2018.
‘The other important point to note about the chart (and about markets in general) is that they look forward. Always.
‘Bank share prices peaked in May 2017. According to Corelogic data, Aussie house prices peaked in September 2017. The market could see what was coming!
‘The banks continued to decline throughout 2018, reflecting the housing market’s ongoing deterioration…
‘But the sharp falls at the end of 2018, and the subsequent sharp recovery, suggests the worst may be over for the housing market. The chart is telling you that in a few months’ time, you’re likely to hear news that house prices have stabilised.’
Here we are a few months later and the mood towards housing has changed markedly. Things are by no means bullish. But they are not quite as bad as they were in March.
For example, below are some quotes from the Australian Financial Review and Sydney Morning Herald, respectively, from March. I used these in my subscriber report to show where popular opinion was at regarding the housing market.
‘Some investors are acting decisively to beat the property clock, dropping their reserve prices to meet the market before it falls any further and wipes out whatever gains they have made on their investment.
‘Following the revelation in AFR Weekend that the property downturn has left the buyers of as many as 450,000 properties in Sydney and Melbourne with homes worth less than what they paid, weak weekend clearance rates point to the emergence of FONGO, or the fear of not getting out before prices fall further.’
‘To some it’s a bloodbath in the making. Others see it as a simple correction. But all agree Australia’s property boom is well and truly over.
‘Every day there are Melbourne and Sydney property owners who put houses and units up for sale in the hope they can quickly find a buyer and the dream of the new owner offering a high price.
‘But in a sign of the downturn in both markets, more than 8000 of those who entered the market in March of last year are still waiting.
‘Even though the number of new properties being put on the market has dropped by 18 per cent in Melbourne and by 22 per cent in Sydney, the “for sale” signs on front lawns are multiplying.’
Grim stuff, right?
But the market was saying that this had all passed. If you’d listened to the media reports, you would not have been in the right frame of mind to pick up some bargains.
So do yourself a favour. Don’t listen to the experts. Listen to the market. It will make you a much better investor.
Editor, The Rum Rebellion
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