Tags: crazy | trades | investors

Why I Like the Crazy Trades, and Why You Should Too

Why I Like the Crazy Trades, and Why You Should Too
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By    |   Friday, 17 August 2018 01:23 PM EDT

As human beings, our brains are still wired from our caveman days. Given that we had thousands of years of eking out an existence of hunting and gathering, our brains are poorly equipped for the rapid changes of the past few hundred years. And those changes are only accelerating.

Consequently, we make a lot of mistakes. Today, the stakes are pretty low. Ordering a meal you don’t like at a restaurant or getting the wrong brand of deodorant isn’t as important as recognizing when to fight a tiger and when to run away.

But we still make mistakes.

When it comes to investing, one of the biggest mistakes people make is to extrapolate current, short-term trends out indefinitely. It’s why something that goes up tends to keep going up—more money and more investors are flocking toward it. And it’s why an out-of-favor investment idea can’t seem to catch a break. It probably can’t until everyone who wants out is finally out.

That’s why most investors stayed on the sidelines in early 2009 when the stock market was bottoming from the 2008 financial crisis. Despite the worst drop in stocks since the Great Depression, many missed the boat. Indeed, estimates are that the total percentage of the population invested in stocks actually peaked 18 years ago, at the height of the tech bubble in 2000!

Outside the broad market, this trend manifests itself in individual companies far too often as well. That leads to one of my favorite phenomenon: the crazy trade.

That’s a trade that cuts against conventional wisdom so much that someone invariably tells me I’m crazy. Maybe it’s a cancelling subscriber. Maybe it’s even a friend or family member. It doesn’t matter who it is, or how well I know them. When I get told one of my trades is crazy, I know I’m on to something.

That’s because a crazy trade usually involves some out-of-favor idea that’s ripe for a turnaround. Maybe that happens quickly. Maybe it takes a while. But those trades usually work out. That’s because those trades are surrounded by fear, and fear doesn’t last forever.

I was told I was crazy buying heavily into stocks in early 2009. And, yes, at the time, with a long drop already behind us but no end to it in sight, some concern was justified over the short-term. Yet subsequent events have proven that buying after a big drop, when valuations were at exceptionally good levels, was the right call.

Today, after a long bull market, fear of a bigger pullback is rising. That’s in spite of increasing economic growth as measured by employment and GDP. While there are some yellow flags, like market valuations in general or a narrowing yield curve, we’re not quite at the point yet where things are likely to end. Give it a year or two.

In the meantime, the sideways stock market of 2018 only looks ugly compared to the low-volatility rally it had in 2017. But thanks to individual earnings reports and various fears flaring up in the markets, it’s been a banner year for trading and getting some decent values on temporarily out-of-favor names.

For months now, I’ve been pounding the table on AT&T (T). Shares are finally starting to move off their recent lows. With the generous dividend shares pay, however, this is one area where buying during periods of fear also mean locking in a high yield. That’s a win-win in my book.

While technology companies have dominated headlines, traditional businesses making physical goods that the world needs have fallen somewhat out of favor. That’s created some great buying opportunities as well.

Subscribers to Insider Trader Alert and the Financial Braintrust have seen a number of trades on the stodgy, but immensely profitable Newell Brands (NWL). And while General Electric (GE) shares have been one of the worst performers in stock market memory, they’ve fallen so much at this point they’re looking like an attractive, if crazy, value here as well. In time, the fears surrounding these specific companies will fall by the wayside, although that will take time as both companies are still technically restructuring themselves.

And then there’s last year’s market darlings, the cryptocurrencies.

I actually like them now. I know I warned last year as this new asset class entered a parabolic phase, where it rallied so much so quickly after a slower and more sustainable rally that a pullback looked inevitable. We’re now seeing signs of bottoming behavior, where there’s a lot of daily volatility as crypto prices bounce up and down a lot daily. As that fades, a new rally will likely emerge, albeit a slow one.

In the crypto space, I prefer to avoid Bitcoin. It’s too followed, and there are better bargains to be had in other major players like Litecoin or Ripple. Ripple looks particularly attractive, as it’s now down over 90 percent from its all-time highs (set back in the distant past of January 4th, 2018).

Unless people completely give up on cryptocurrencies, that space will, in time, recover. Much like commodities, it’s likely going to be a place with big gains and losses. But just as soybeans or gold don’t go to zero, neither will cryptos that are designed well and have investor interest.

With thousands of traded stocks changing hands every day, not to mention options, currencies, commodities and so on, there are always some crazy trades out there. Embrace them. They may not feel right at the time, but the reasons why they don’t feel right may be driven more by feelings than facts. When you follow the crazy trades, you’re getting one of the few market bargains out there at any given time.

And of course, consider the corollary of what I’m saying: If you’re investing in something everyone else already owns, doesn’t that make you the greatest fool?

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.

© 2024 Newsmax Finance. All rights reserved.


AndrewPacker
With thousands of traded stocks changing hands every day, not to mention options, currencies, commodities and so on, there are always some crazy trades out there. Embrace them. They may not feel right at the time, but the reasons why they don’t feel right may be driven more by feelings than facts.
crazy, trades, investors
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2018-23-17
Friday, 17 August 2018 01:23 PM
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