two glasses of water This mayoversimplify things but think of investing as a zero-sum game. It'slike two glasses of water, both half-filled,  connected bya pump. The water level is a metaphor for the price. (Photo:Shutterstock)

|

You've seen this movie before. All the big tough guys are in afight. It's one of those “it's a guy thing” kind offights, where they have more enthusiasm (and interest) inbeating each other up than in the treasure they're fightingover.

|

All of them except for the diminutive bookkeeper they broughtalong because, well someone had to be smart enough to count thetreasure. No, this pipsqueak is hiding behind some bush, trying toavoid the fray. This doesn't surprise you. They made fun of him theentire movie.

|

But it turns out he's the real smart one. As the fightinevitably ends, the small guy ends up being the last man standing.He casually strolls through the carnage, careful not to step intoanything that looks gooey, picks up the ignored treasure, and ridesoff into the sunset with the damsel who was in distress.

|

I can't remember if this was a science fiction movie or awestern. What I can remember, though, is the definition of ametaphor. And this classic movie trope represents an apt metaphorfor the contrarian investor.

|

Do you remember when “contrarian investor” was the thingeveryone wanted to be? They were toasted by Wall Street until thecontinuous and expansive bull market of the 1990s toasted them in adifferent way.

|

Yet, contrarians survived. Maybe under the radar, but they stillsurvived. That's because they knew the secret to making money frominvestment fads.

|

We're in an era rife with investment fads (see “ExclusiveInterview: Robert R. Johnson Says Cryptocurrency 'Laughable,' Won'tEnd Well,” FiduciaryNews.com, June 25, 2019). Sometimes you seethem, sometimes you don't. They look just like investment trendsuntil they don't. People make money with them until theydon't.

|

Here's how a contrarian makes money with them: They don't. Theymake money the old-fashioned way. (What's more contrarian to “fad”than “old-fashioned”?)

|

This is not to say contrarians don't make money as a result offads.

|

Here's why: This may oversimplify things but think ofinvesting as a zero-sum game. It's like two glasses of water, bothhalf-filled, standing next to each other and connected by a pump.The water level is a metaphor for the price.

|

The water level is equal until you start pumping water from onglass to another. That glass that's filling up is the fad. Theglass being drained is the “old-fashioned” way.

|

Those who bought into the fad early (when the water level wasequal) certainly made a killing as the water level rose in theirglass. In fact, the contrarians who insisted in staying with, muchless buying into, the draining glass look downright crazy. Littledo the fad followers suspect, but the contrarian's strategy may beso crazy it just might work.

|

As the madding crowd stampedes towards the fad filling theglass, the cost of buying a piece of the draining glass goes lowerand lower. Sometimes, to those without a scrutinizing eye, itappears the contrarians are stubborn. They insist on trying tocatch a falling knife.

|

All fads finally fizzle. The water in that glass has nowhere togo but back where it came from. And usually in a rush. Thecontrarians everyone laughed at now hold all the real estate in theformerly draining (now filling) glass. Those wanting to abandon thefad have no other choice than to bid up the price for the rapidlyfilling contrarian glass. Soon, nearly all of the fad glass isdrained into its once scorned companion.

|

Now, here's the key. Recall how each glass started even. Theearliest the faddists could have bought into the fad glass was atthe half-filled point. If they sold just as the glass topped off,they would have doubled their investment. Of course, those whocouldn't sell fast enough until the glass was entirely drained losteverything.

|

The contrarian, however, paid no more than when the glass washalf-filled, and could have paid significantly less as the waterdrained to the other glass. In the best case, as the contrarianglass was nearly completely drained, the cost would be merelypennies.

|

Then, as the fad faded, the contrarian started making money. Alittle at first, but increasingly more. As the contrarianglass filled to the top (meaning all the water had beendrained from the fad glass), those who bought contrarian at thehighest (when the initial water levels between the two glasses wereeven) doubled their value. But all other contrarians fared farbetter.

|

And far better than those captivated by the fad.

|

A contrarian doesn't make money in the middle of the fad – inthe middle of the fight, if you will. A contrarian makes money onlyafter the fad becomes a carnage and all the fad believers flockback to the old-fashioned way the contrarian never lost sightof.

|

So, what would you rather lift a glass to? Bragging about yourinvestments at some cocktail party or retiring in comfort?

|

READ MORE:

|

Get them addicted to saving —Carosa

|

Would rank-and-file 401(k) retirement saversbenefit from working with an advisor?

|

Fee compression: Bad for retirement savers? —Carosa

Complete your profile to continue reading and get FREE access to BenefitsPRO, part of your ALM digital membership.

  • Critical BenefitsPRO information including cutting edge post-reform success strategies, access to educational webcasts and videos, resources from industry leaders, and informative Newsletters.
  • Exclusive discounts on ALM, BenefitsPRO magazine and BenefitsPRO.com events
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.

Christopher Carosa

Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).