Investment Contrarians

Investor Mistakes

Investor mistakes are more common than you might think. In general, investor mistakes occur when the investor or trader makes a miscalculation on a trade or a stock. For instance, an investor may ignore a major change in regulations that could affect a market sector or some companies. By ignoring this change, he or she makes a mistake that could subsequently erode the value of the stock. Another example of investor mistakes is when a stock reverses its course on bad news that is specific to the company, and the investor ignores the change and holds the stock, only to see a greater loss. These are only a couple examples of investor mistakes that you need to be aware of.

How to Invest in a Market That Makes Little Sense

By for Investment Contrarians | Sep 13, 2013

Invest in a MarketEveryone gets a bit trigger happy when trading the stock market. But why not? The correct move could make you a lot of money in the stock market and a bigger pool of capital to trade on.

This is the reason why I trade. I love making a trade and coming out on the right side. But when things don’t turn out quite right, you need to fess up to your mistake and walk away from a bad trade in the stock market. This will help you move on to your next trade and avoid any major investor mistakes chasing a stock lower.

Trading in the stock market is not about gambling—don’t get the two confused.

Trading involves careful analysis of the stock market and not just simply throwing your money down on a roulette table and hoping the little ball lands on your spot.

Even now with the risk in Syria, the forthcoming bond tapering, higher interest rates, the continued stalling in Europe, the lack of job creation, and the absence of revenue growth in corporate America, the market is trading like everything is on target and nothing is wrong.

The non-farm payrolls reading for August was soft, and the downward revision of the July headcount was abysmal. People still need jobs and lots of them, so everything is not as rosy as you might think.

I call the current bullish stock market sentiment nothing more than hopeful optimism; it’s not based on the stock market facts.

The only positive is the low comparative bond yields, and the historically low interest rates are the only thing holding up the … Read More

One Simple Measure for Investing in a Volatile Market

By for Investment Contrarians | Jun 18, 2013

Simple Measure for Investing in a Volatile MarketVolatility has been edging higher since the end of 2012, but so far, the stock market has held up pretty well.

Take a look at the chart below of the CBOE Volatility Index (VIX), also known as the “Fear Factor Index,” based on the S&P 500 Index. The VIX reading is holding around 16.8—well below some of its high readings since 1990, as shown on the chart. When the VIX is low, it suggests traders are relaxed and not concerned about the current stock market climate; but you need to remain alert, because investor mistakes occur when people are too confident.

The chart shows the inverse relationship between the VIX, shown by the red candlesticks, and the S&P 500, reflected by the green line, since 2002.

Volatility Index Chart

Chart courtesy of

At this point, there are some indications on the chart that a near-term top could be surfacing in the stock market, so you will need to be alert to this. Even just the rapid rise in stocks this year should give you a sense of concern, as gains in the stock market are clearly unsustainable.

Moreover, the individual risk of stocks versus the S&P 500, also known as the beta, should be monitored. When the stock market rises, stocks that are associated with high betas generally will move up faster than lower-beta stocks. This is the reason why the Russell 2000 Index, which tends to have a higher average beta than the S&P 500, is leading the pack.

Higher-beta stocks are generally technology stocks. What this means for you is that if the stock market pauses, the higher-beta stocks will … Read More

Momentum Is Great—If You Are on the Right End

By for Investment Contrarians | Apr 23, 2013

Momentum Is GreatApple Inc. (NASDAQ/AAPL) finally broke below $400.00 last Thursday, an occurrence that I recently discussed in Investment Contrarians. As I said, the short term will generate volatility for the stock, but I continue to believe there is still hope the company can turn around going forward.

The problem with a momentum company like Apple is that with its rapid rise in share price to over $700.00, there’s immense risk for investor mistakes to occur if the company does not consistently deliver. And I’m not talking about delivering just average results; momentum companies such as Apple have to deliver exceptional results to the market and please investors.

In the case of Apple, soft growth over the last several quarters has proved devastating to the stock and can cause investor mistakes.

After beating Thomson Financial earnings-per-share (EPS) estimates by 22.5% in the fiscal 2012 second quarter, Apple came back and offered up three straight dismal quarters in which the company fell short on earnings in two of the three quarters and barely beat in the most recent. Ignoring these falls inevitably led to investor mistakes, as demonstrated by the share price.

The same is said for the overall stock market. Traders gave investors strong gains in the first quarter, but that has not been the case in April, as global growth concerns are surfacing. The aftermath has been selling pressure and the greater likelihood of more selling down the road.

The two cases of Apple and the overall stock market demonstrate the need to be careful with momentum stocks to avoid potential investor mistakes.

The reality is that once the market euphoria … Read More

Is the Only Safe Investment Your Piggy Bank?

By for Investment Contrarians | Apr 10, 2013

Safe Investment Your Piggy BankI think maybe it’s time to start putting your money in the piggy bank to avoid any major investor mistakes.

With the Dow and the S&P 500 at record highs, I’m trying to find reasons to want to buy in this market. However, I’m finding it difficult to even want to buy, as I still feel a stock market correction is on the way.

I’m sorry, but I can’t tell you when this will happen or by how much. All I know is that you need to be careful to avoid possible investor mistakes.

We have the first-quarter earnings season that started on Monday, and if you believe the early estimates, there will not be many happy traders and investors out there.

FactSet estimates earnings will contract by 0.7% in the first quarter, followed by an overly optimistic second half, predicting an explosive earnings rally of 10.1% and 15.6% for the third and fourth quarters, respectively. I’m not sure why FactSet is this giddy, but in my view, for these growth metrics to emerge, all of the stars will have to align.

I’m still not convinced corporate America is set for another growth spurt. The Federal Reserve knows this. Based on the recent non-farm payrolls reading showing a dismal 88,000 new jobs, I just can’t comprehend how the country is set to achieve revenue growth.

I may sound like a downer, but I consider myself more of a realist who wants to avoid investor mistakes.

And Main Street has also appeared to have forgotten the debt, while the government and Congress are still battling it out to come up with … Read More

Investment Strategy Lessons Courtesy of Cyprus

By for Investment Contrarians | Mar 26, 2013

Investment Strategy Lessons Courtesy of CyprusThe current crisis in Cyprus is a sad example of the mistakes that many professional and retail investors make when creating an investment strategy. This bailout plan is painful, but it is only a symptom of the problem, not the cause.

While much blame will be placed on finance ministers and international organizations, such as the International Monetary Fund (IMF), I believe the real blame, which stems from one of the most common and biggest investor mistakes, lies in the mismanagement of capital by the banks themselves—the mistake: not diversifying their assets.

Essentially, the current crisis stems from the fact that Cypriot banks are approximately 7.5-times larger than the entire country. These funds come in the form of deposits into the banks, which then need to create an investment strategy for this capital.

In most normal economies, the banks take in deposits and lend to businesses, supply mortgages for homeowners, and make various investments, both domestically and internationally. The biggest investor mistakes occur when there is a lack of diversification.

Because Cyprus is so tiny, these banks cannot properly diversify their investment strategy domestically. Instead of spreading the capital amongst various international investments, they essentially pumped a huge share of this capital into Greek bonds.

While hindsight is 20/20, and we now know how bad an investment strategy this was, even before the crisis, a proper risk evaluation should have told anyone that this is one of the biggest investor mistakes possible.

When the Greek bonds tanked and investors in these bonds had to take a haircut, the assets on the books of Cypriot banks declined substantially versus their liabilities, … Read More