Go Against the Crowd

One of the best ways to make money in stocks is to be a “contrarian” investor, going against the crowd. Superinvestor Warren Buffett would likely agree, having said, “I like to be fearful when others are greedy and greedy when others are fearful.” That’s much easier said than done, though. When the market is undergoing one of its occasional crashes and gobs of investors are selling shares in a panic (thereby pushing stock prices even lower), it takes a lot of discipline to hang on to your holdings. It takes an even stronger stomach to buy shares of stocks that others are selling — but that’s often the best time to do so, as you can buy into great companies at depressed prices. Meanwhile, when the market has been booming and many people are seeing great gains in their stocks, it’s often a bad time to buy, as shares may have been bid up to overvalued levels and they may be due to retract a little soon. Remember the old investing adage: “Buy low, sell high.” It seems like common sense, but it can still be hard to do, and many people who succumb to their emotions end up buying high and selling low — a recipe for disappointing results. When many investors turn away from a company, that could be an ideal time to consider buying shares. Plenty of great companies fall on temporarily tough times. Just be sure to research the situation thoroughly and determine whether its problems seem likely to be short-term instead of long-term. It can also be effective to keep a chunk of your money on the sidelines, waiting for a great opportunity or two. Buffett, for example, talks about waiting for “fat pitches” to swing at. If you’re patient, you can find some great companies on sale occasionally, and the lower the valuation, the greater the margin of safety. Take time to learn more about investing and to think for yourself. Check out books by Peter Lynch, or John Bogle’s “The Little Book of Common Sense Investing” (Wiley, $25).