And although the health benefits are certain and undisputed, many of us find it hard to exercise, to eat healthy and stay active. We knowingly chose to do the easy thing. Any wonder why 68% of adults are either overweight or obese?
In the markets, successful investment oftentimes requires us to do the tough things, the uncomfortable things, the painful, frightening or humiliating things we don t want to do, both in terms of what we trade, and in how we manage our positions. The herdin a prudent fashion is what gets a contrarian investor up off the couch.
In what we trade
You might not recall that for most of the technology boom, especially the earlier years like 1996-98, most investors avoided technology stocks, frightened by the high valuations and uncertain business concepts. It was hard to buy Yahoo at a P/E ratio of 1,200. Or America Online at a P/E of 475. But for a while a rather long while, it worked.
Similarly, early last year, betting on discretionary stocks like Home Depot, Panasonic or Consumer Discretionary Select Sector SPDR Fund was extremely difficult amid horrific retail numbers and widely discussed fears that the consumer was dead. Yet many consumer-oriented names went to enjoy a strong year-long rebound.
For example, Lehman Brothers might now be a dirty word, but many of the trust preferred securities the company created before the downturn have soared lately as investors search for dividends and other portfolio yield.
Lehman ABS 6.00%, for example, bears the moniker Lehman but is dependent on the income distributions from life insurer Prudential Financial, not the failed securities firm. The security yields 6.39% and is up sharply in price appreciation with other fixed income year-to-date (read the prospectus.
Hard to Swallow
MSCI Europe Financials Sector Index Fund (EUFN) 3 months>
Given the abysmal headlines from across the pond, many find it troubling to even consider a security consisting of European financial stocks right now. Yet MSCI Europe Financials Sector Index Fund, which holds beaten-down stalwarts like HSBC, Banco Santander and UBS, could easily regain higher levels should risk appetite in Europe improve. Right now it s nearly impossible to persuade still risk-averse investors on investing in European financials, not unlike buying a dot-com stock in the immediate wake of the 2000 tech crash. It s just not easy to do.
Or is there a more despised acronym in the county right now than GMAC, the bankrupt financial services arm of General Motors which received (and has yet to repay) a multibillion-dollar U.S. bailout? So imagine the moxie it would take for your adviser to call you up and suggest buying notes from GMAC LLC, now rebranded as Ally Financial 7.35%, which yield 9% and have leapt back from near death levels.
And how we trade it
Even more important than doing the hard thing with regard to what you buy, is maintaining the same contrarian approach when it comes to how you buy it your investment technique. What s maddening is that, as human beings, we re hardwired to do the easy (read: wrong) thing when it comes to managing a portfolio.
Everybody has a losing investment at one time. Ironically, the easy response, the one that feels most favorable, is to ignore our losses, telling ourselves we re in it for the long haul and that XYZ is eventually bound to bounce back.
The hard response, but also the disciplined and correct one, is to take the loss, and move on to another trade. Every portfolio wrecking collapse starts as a small loss and a trader who just had to be right.
Conversely, when we are fortunate enough to actually have a winner on our hands, nothing is more pleasurable and effortless than to take the profit, no matter how insignificant. Selling a winner feels great: It s a real-time, real-money affirmation of our foresight and skill. It s euphoric; like a drug hit.
Yet as we ve previously noted, the real money is made by letting the winners run, not immediately cashing them in. The fact is it s uncomfortable to sit with an open, winning trade. It s hard. But it s essential in order to fully exploit those instances where we actually get it right.