Contrarion Investing / Investing

The rubber band effect

rubber bandAfter 30 years in the Investment industry, it ceases to amaze me how investors continue to be swayed, pulled, and influenced by what I call the “rubber band effect.” Simply put: many investors react rather than think ahead and anticipate.

Similar to a chess player, an investor must look not at the last move or even 1-2 moves ahead. It is estimated that Master Chess players can anticipate 4 to even 8 moves ahead. This encompasses counter moves and opponent attacks and pitfalls.

I find that many investors look at what has happened and then invest based on results, or worst, news that have already happened. If you put money into the top performing mutual funds after the results, you are one of these people. It usually results in the investor moaning that the industry is “fixed” and no better than gambling or a scam. While a top performing fund does show successful management, and any money manager will tell you, to reproduce these results consistently is a much bigger challenge. Some examples that I encountered; back in the 1980’s when a leading commodity trader magazine put a chess-pieces 2bpicture on the cover of a U.S. dollar floating in water with a caption of “Will the U.S. Dollar drown?” Of course that was the beginning of a 10-year run/appreciation of the “Greenback.” At $1800 gold last year, commercials came out of the wood work advertising the advantages of buying gold and soliciting investors. It would have been a lot better to look at gold as an investment even 7 years ago after it had doubled to $575. When good news hits the market, 9 times out of 10, it reacts in the opposite direction. A novice feels like his head is spinning and doesn’t understand. A professional knows that the market has previously factored in this event. It is called “buy the rumor-sell the fact.”

Real estate…

Another great example of where timing is imperative. Just 3 short years ago, U.S. Real estate prices plummeted after the mortgage meltdown. Savvy investors, that I know personally, scrambled to put together groups to fund or buy distressed real estate. This also happened in Dubai and the U.A.E. where we are located. On the news this morning was a segment where people are lined up to buy properties, now sometimes on the market for just 1 hour. It’s like nothing ever happened. Remember my previous post think like summer in winter and winter in summer? When do you want to buy? When people are willing to walk away at any price or fight with other buyers for the same piece of property?

True Innovators and entrepreneurs recognize this. They are well aware of timing…

While there might be a process which is obsolete or an unmet problem or need that needs to addressed, innovators look far beyond the initial issue. They know there has to be a better way. With the pace of innovation in technology, many of yesterday’s problems are finding solutions through this doorway.

One visionary that we are involved with is Noel Guillama, the CEO of The Quantum Group. Ten years ago, he had the vision to change healthcare through technology, well before any of the recent legislative mandates. This has put his firm in an enviable position going into recent U.S. healthcare mandates and armed with awarded patents that begun years ago. “Like shooting at a moving target, one must anticipate where something will be, not where it is,” he explained.

iStock_000005922897SmallAnother reason I hold Noel in such high esteem, was because after meeting him on a due-diligence trip to his offices (in 2010), his insistence and his explanation (to me) of why he felt the U.S. markets had to reach all time highs. As a proverbial “Bear” and ex-floor trader, I always have looked for the opportunity to sell overvalued markets, not buy them. After 30 minutes, I was converted. That was a good trip.

So the next time your “brother-in-law” has a hot stock tip or your doorman whispers into your ear, realize the world has tremendous opportunities everyday. Just make sure you are at the “ground floor” level of that idea and not up in the penthouse.

One thought on “The rubber band effect

  1. Pingback: Sometimes, you don’t need a crystal ball | Win

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