Long Term Investing = Contrarian Investing?
Economists muse about just why it is that stock markets around the world are subject to fits of "irrational exuberance" and "excessive pessimism." Why don't rational and informed investors take more steps to bet heavily on fundamentals and against the enthusiasms of the uninformed crowd? The past decade gives us two reasons. First--if we had correctly identified long-run fundamentals a decade ago--betting on fundamentals for the long term is overwhelmingly risky: lots of good news can happen over a decade, enough to bankrupt an even slightly leveraged bear when stocks look high; and lots of bad news can happen over a decade enough to bankrupt an even slightly leveraged bull when stocks look low. Thus even in extreme situations--like the peak of the dot-com bubble in late 1999 and early 2000--it is very difficult for even those who believe they know what fundamentals are to make large long-run bets on them. And it is even more difficult for those who claim they know what long-run fundamental values are and want to make large long-run contrarian bets to convince others to trust them with their money.
As J.P. Morgan said when asked to predict what stocks would do: "They will fluctuate."
Perhaps this is how it should be: if it were easy to pierce the veils of time and ignorance and to assess long-run fundamental values with a high degree of confidence, it would be easy and safe to make large contrarian long-run bets on fundamentals. In this case the smart money would smooth out the enthusiasms--positive and negative--of the overenthusiastic crowd. And stocks would fluctuate less. And there wouldn't be teasing evidence at the edge of statistical significance of large-scale deviations of stock market prices from fundamental values.
Source: Bigpicture blog
