The Upcoming Bond Bull Market
The worse things seem, the better the opportunities are for profit.
Such is the very nature of investing.
Baron Rothschild, an 18th-century British nobleman and member of the Rothschild banking family, once said:
“The time to buy is when there’s blood in the streets.”
He should know. Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon.
Warren Buffett once said the same:
“Be fearful when others are greedy, and greedy when others are fearful.”
In other words, going against the crowd often yields the most successful outcomes.
This is the essence of contrarian investing.
Contrarian investors have historically made their best investments during times of market turmoil. During the crash of 1987 (also known as “Black Monday”), the Dow dropped 22% in one day in the U.S. In the 1973-74 bear market, the market lost 45% in about 22 months. The “Great Financial Crisis” of 2008 saw asset values get cut in half. The list goes on and on, but those are times when contrarians found their best investments.
But being a contrarian is extremely difficult. As Howard Marks noted:
“Resisting – and thereby achieving success as a contrarian – isn’t easy. Things combine to make it difficult; including natural herd tendencies and the pain imposed by being out of step, since momentum invariably makes pro-cyclical actions look correct for a while. (That’s why it’s essential to remember that ‘being too far ahead of your time is indistinguishable from being wrong.’)
Given the uncertain nature of the future, and thus the difficulty of being confident your position is the right one – especially as price moves against you – it’s challenging to be a lonely contrarian.”
Of course, behavioral analysis shows that investors always do the opposite of what they should do – they repeatedly “buy high” and “sell low.”
This is why being a contrarian is both lonely and tough.
If you could buy the stock market today at a 50% discount – would you?
Well, there is currently a glaring “contrarian” opportunity in Treasury bonds as I noted last weekend:
“With bond traders more short than at any point in history, the ultimate “reversion to the mean” in Treasury’s will drive rates towards zero.”