John Paul Getty (in his time one of the worlds richest men) said “buy when everyone else is selling and hold until everyone else is buying.”
Moving against the market (or even just staying invested when the prospects seem bleak or unsettled) is easier said than done. It takes courage to do what others are not.
The underlying philosophy of Getty’s statement is that markets and economies work in cycles - they do not go up for ever and they do not go down for ever. His advice is that success will come from being contrary, going against the trends.
Investors are more likely to be chasers however - investing on the basis of past or current performance. What goes up can only go higher appears to be the rationale.
If $100,000 was invested into a balanced portfolio on 1 January 1987 of NZ fixed interest, property and shares and international shares it could have grown to $165,000 by the end of 1994.
If the investor was a chaser however, investing in last year's top performing sector, the $100,000 would have decreased to $74,339 by the end of 1994 - a negative difference of $90,661 and clearly not a good result.
A study in the UK compared a Chaser against an investor who invested against the market - in a counter-cyclical or contrary manner.
The period used for this study was 17 years between 1971 and 1989 and the starting amount $20,000.
In this study the Chaser made a profit. His $20,000 grew to $37,229 an average return of 3.75% per year.
However, the contrarian investor saw his $20,000 grow to $324,188, averaging 17.8% per year. A substantial difference.
These examples serve to raise questions about the effectiveness of the average investors' strategy –
• Tending to buy investments that have performed well in the recent past
• Their reluctance to sell some or all of an investment which has shown good recent performances even though they are advised that the market conditions that produced the good result have changed
• Looking to sell out of particular investment merely because that sector is not currently performing.
It is also a lesson that an investment which goes down in value is not necessarily a bad investment - it might just be that it’s turn in the cycle has not yet come.
