You Don’t Know Squat. Yeah, You

During last week’s link dump, I treated you to a post by dividend growth investor Dividend Pig titled You’re Not Contrarian and Don’t Know Squat. As you can probably imagine, the title of that particular post got me a little excited. Not swear words excited by any means, but a little excited nonetheless. It could be said that I was semi excited.

Anyhoo, I clicked through to the post, and encourage you to do the same, since it’s pretty darn good. To summarize, Mr. Pig tells his readers about a conversation he had with a friend who works on Wall Street. His friend used information that was freely available to make a nice tidy profit on a risky, beaten up stock that the market hated at the time. This “friend” sounds a lot like my kind of guy.

What Mr. Pig concludes from this story is that investors like you and me (mostly you, sorry) are screwed, since people who are involved in a much more intimate way have all sorts of advantage over us little guys. After all, his Wall Street friend was actually involved in the IPO of the company he later made a boatload of money on.

To quote the author:

This of course got me thinking. We all try to be contrarian investors, and many of us believe that we are. There’s no doubt that if you are intelligent, disciplined, and patient, (which I believe many of the wonderful bloggers I read are) you can buy companies at fair prices. But are we really contrarians? Did you buy Citigroup when it was trading at $1? That’s a contrarian investment. What about SuperValu, when it hit $7? Or Paychex at $21?

Here’s the problem with that argument. What he’s suggesting isn’t being a contrarian. It’s being a market timer. And a HELL of a market timer at that. How long was Citigroup under $1? All of 20 minutes? It never actually closed under $1 ($10 to adjust for the recent reverse split), and only spent time under that magical cutoff for parts of 2 days. I could make the same argument for the other 2 stocks presented in the argument. You’d have to be either remarkably lucky or a really, really good market timer to pull that off.

Being contrarian isn’t being a market timer. I bought Citigroup on the way down, twice, getting my position for an average cost of $12. I did the same thing with General Electric, picking up my whole position at $12, right around the time the market thought the world was going to end. Contrarians generally don’t give two craps about picking up a stock right at the bottom, since their target price is so far ahead of the current price. Who cares about another 5% when you’re aiming for 200-400%?

Trying to figure out when to buy a stock is hard for anyone, let alone contarians. Everyone tries to time the market to some degree, with the exception of the girl who just invests her token amount in index funds every month. Contrarians aren’t some sort of super creature who are really good at timing the market. We just buy when the market appears the most dark.

But I’m cherry picking my argument a little, losing focus in the details. The big picture point of the article is, in my view, that contrarians believe they have some sort of knowledge advantage over other investors. Contrarians think they have a unique ability to see past all the noise of the market, and buy something that, to them anyways, looks good. Sometimes this works out, sometimes it doesn’t, but the oversized winners are supposed to make up for the losers.

Then there’s the other part of the post where he’s exactly right. I don’t know squat. Neither do you. We’re not idiots, but our chances of ever becoming experts in the markets are pretty much zero.

And yet we think we are, emboldened by the fact that our friends/spouse/whoever thinks we’re so smart at investing. Our heads swell as we explain to them terms like debt coverage or price earnings ratio. Just because we’re smarter than the average Joe doesn’t mean we’re any good.

This brings us back to a very basic question, one that will define your investment philosophy and your returns along with it. Can the average investor beat the market using the tools available to anyone? Can a dividend growth guy or contrarian investor beat the market without an MBA and unrestricted access to Wall Street? Is the internet really the great equalizer in this game, or does too much information hurt the average schmoe?

That’s the question I struggle with all the time. Sometimes, when a get a stock right, I think I’m smarter than the market. And then I get one wrong, and the market kicks my ass. I’m more high and low than your friendly neighbourhood meth head.

I’d like to end this post with an answer, saying that I’m certain that I can outperform the market using only my brain and a laptop. I’ve been investing for close to 10 years now, and I consider myself pretty smart when it comes to this stuff. And, the more I read and find out, the more I’m starting to realize I just might not know anything at all.

Readers, do you believe a solid portfolio using your favourite strategy can beat the market long term? Or, is beating the market over a long term basis a lot of luck with only a little skill mixed in?

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