Perfect Timing

It’s the essence of being a successful investor. Invest in a stock at a low level and to sell it at the top.

To achieve this, financial institutions let nothing untouched. Hundred of people spending thousands of hours feeding millions of company- and economic-data into computers.

Besides this fundamental approach, we have also the technical analysis where the focus is to use market-statistics to determine a pattern and to figure out trends.

I wouldn’t say this methods are useless, I fact the conclusions of these market- or sector- studies have sometimes an considerable impact on the trading floors.

But I doubt, there is much of a practical use in terms of trading for private investors to follow these reports – published by banks, many of them available online for free.

First, when you hear the combination ‘bank & free’ – you should switch into alert-modus.
No, they do not miss inform you, the data is correct or at least to the best of their knowledge.

The problem is, that you are too late to profit from this research. The bank offered the conclusions and trading options of the report possibly to clients first, they order the stock at, let’s say, 50 a share. When the general public finally gets the report online and buys in, thereby pushing the prize up to, let’s say, 53, the clients make a quick 6%-profit, while you can consider yourself lucky, when the share remains at 53.

And there is the fee-issue. Since you do not pay for that report (but the analyst who composed it has a quite good salary) the bank’s regular trading-tips are in a way a source of income, because the more you trade, the higher the fees a bank cashes in from you.
Don’t get me wrong, I am myself reading this reports almost on a daily-basis. And there is a lot of valuable information about companies, sectors or countries, I just wouldn’t use these reports to act immediately on the market.

There are other ways to improve your chances. The best indicators to really make a killing are contra-indicators.

You don’t need to have a economic degree to understand these indicators – just observe the media for instance. Then you only have to do the exact opposite they propose and you’re probably make the deal of your life.

To underscore this point we go a little back in time to 1979. After several years of a weak economy (oil price-shock, double-digit inflation), the mood on the market was not exactly festive. Stocks were out of fashion, so the media coverage was rather thin. Then, in August, the magazine ‘Business Week’ ran a title story that predicted nothing less than ‘The Death of Equities’.
There was no big controversy about this publication, most people agreed with the general tone of the story about inflation destroying the stock market. The Dow Jones would have a dark future.

Business Week, August 1979

The night is the darkest just before dawn and shortly after the ‘Death’-story in ‘Business Week’, the Dow Jones came to life. In fact, it was the start of the greatest bull market in history. From about 800 points in 1979, the Dow Jones Industrial Average climbed to over 10’000 points over the next 20 years.
To give you a perspective of this magnitude: had the Dow kept this pace, he would reach 125’000 points in 2019.

The profitable principle of betting against media-covers is working the other way round as well.
The real estate boom in the early years of this century not only sent housing prices through the roof, new refinancing-alchemy and low interest rates helped also stocks to rise dramatically from 2003. What’s was good for real estate, was good for stocks.
Fortunately, there was no cloud on the horizon for real estate, and the cover of ‘Fortune’ in June 2005 confirmed this widespread view:

Fortune, June 2005

Once again, a simply perfect timing to do just the opposite, because in 2005 started, what became the financial crisis of 2008.
First, falling real estate prices and the exotic valuation of mortgages led to the fall of 2 big hedge funds inside Bear Stearns in 2006 and ultimately to the collapse of the whole bank. Markets were falling from summer 2007, Bear Stearns was number 5 in terms of size of the big banks and the domino went on to number 4, Lehman Brothers, who collapsed in 2008 and the financial crises was reality.

There were only a handful of investors who were betting against the ‘gold-rush’ in real estate – but they made the trade of their life.

One of these guys was John Paulson. In 2007, when financial markets were collapsing, and Wall Street firms were losing massive amounts of money, he made a cool 4 billion USD – or more than 10 million USD per day.


What’s the right investing strategy for 2016? A few thoughts about that in the next chapter:

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