Getting Paid to Come to the Opposite Conclusion

Nov 24, 2015


Waterford, Ireland

Markets were calm yesterday. Investors wanted to panic, as usual, but didn't know what direction to take.

We're not sure either. On the one hand, the world economy seems to be slowing down.

But on the other, Mario Draghi has announced again that he, not willing buyers and sellers, will determine prices. And He wants to see them higher. No kidding. Bloomberg:

  • European Central Bank President Mario Draghi set the scene for further stimulus in two weeks' time, saying the institution will do what's necessary to reach its inflation goal rapidly. The euro fell.
  • 'If we decide that the current trajectory of our policy is not sufficient to achieve that objective, we will do what we must to raise inflation as quickly as possible,' Draghi said in a speech in Frankfurt on Friday. 'In making our assessment of the risks to price stability, we will not ignore the fact that inflation has already been low for some time.'
  • Draghi's comments underline the ECB's concern that the inflation rate in the 19-nation euro area, currently 0.1 percent, will slip further from its target of just under 2 percent amid a high degree of economic slack and slumping oil prices. Policy makers are weighing the need for an expansion to the 1.1 trillion-euro ($1.2 trillion) quantitative-easing program that started in March, or measures such as taking the deposit rate further below zero.

Hell and heaven

The lesson of the last few years is that central banks are hell on an economy, but they're heaven to stock market investors.

What will happen next? We wait to find out.

In the meantime, we're on our way back to the US for Thanksgiving. Before boarding our plane in Dublin, we checked the mail.

Ai yi yi!

  Equitymaster Conference 2016  
23rd January. Mumbai, India
  It gives us great pleasure in extending you an invitation to join us at the Equitymaster Conference 2016. This is going to be one of our most important Conferences ever! And I strongly recommend you attend it.

At the Equitymaster Conference, our best ever line up of speakers, starting with Ajit Dayal (Founder, Equitymaster) and Bill Bonner (Founder, Agora Inc.) will aim to address all your questions about the current investment environment, thereby help you in planning your next steps. Including...

»  Where are the stock markets headed?
»  What should be your investment strategy for Indian stocks?
»  Is it finally time to get bullish on real estate?
»  Is the Gold story over?
»  What's next for India's economy, and the Indian Rupee?

Plus, at the Conference you will get an opportunity to rub shoulders with not just our speakers, but also like-minded investors from across India (Last year we welcomed guests from 33 cities, and 3 countries).

So if you are serious about your investments, The Equitymaster Conference 2016 is something you cannot afford to miss. More details about the Conference and our speaker line up are available here.

We suggest you move very fast on this invitation.

Reserve your seat under our 'Early Bird' opportunity!

'Koch...Paris...the Catholic you have any readers left?' asks a concerned subscriber.

We seem to be annoying left and right. As for the center, it can't make up its mind. Are we knave? Or just fool? We're not sure ourselves.

But we remind readers, and ourselves, that this is a commercial eletter. It is not a hobby. It is not a vanity project. It's supposed to make money. How? By exploring and confronting - rigorously, seriously, and without flinching - contrary, unpopular, alternative ideas.

It does no good, of course, to make readers mad, gratuitously. On the other hand, it does no good to tell them what they can hear everywhere else.

We learn little from the soothing, flattering nonsense of the leading political parties. For example:

  • Yes, we are the best people on Earth. Whatever we do is good. Our stocks always go up. Because our economy always gets better, under the wise guidance of our Fed and Treasury department. Our nation gets stronger and stronger, too, under the watchful eye of our political leaders. And all our children are above average.

We're not clever enough to be a politician. We would surely say the wrong thing. And we're not smart enough to avoid irritating readers either. Besides, on a daily schedule, we don't have time.

So, for better or for worse, we just plunge ahead. Sometimes right. Sometimes wrong. Always in doubt.

Objective vs subjective reality

Of course, some things are true, no matter what you think. Objective reality, you could call it. You leave a can of beer open on the counter and it's going to go flat. It doesn't matter what you or anyone else thinks about it. That's just the way it is.

Step off the curb at the right time, and a cross-town bus will flatten you too. No point in arguing with it.

Other things exist only because you think they do. You might call these 'subjective reality', like government, war, and religion.

God may be an 'objective reality'. But our perception of Him is subjective. And our organised religions are products of our perceptions - products of our own brains and imaginations - trying to fathom the reality of God.

Then, there's another kind of reality - which we might call 'subject unreality' - which is even harder to grab ahold of.

In the investment world, for example, there are things that the great majority of people believe and expect to happen, but because people expect them, they almost never come into existence.

This is the perverse nature of markets. Stocks are most expensive when investors are most optimistic - just before they crash. They are cheapest when people have given up hope - just before they go up.

Markets DON'T do what you expect. The reality doesn't correspond to what we think or what we want.

When large numbers of people expect a particular outcome, a bear market, for example, it won't happen. Because investors will sell their stocks (they probably already have) and thereby undermine the conditions that make a bear market possible.

Or, if lenders expect an increase in debt defaults, they will withhold credit and sell debt, thereby averting a debt crisis.

Quite contrary

In the investment world, only contrary and alternative ideas pay. The mainstream ideas, the conventional wisdom, the soothing nonsense that 'everybody knows' and 'everybody wants to hear' is a losing proposition.

Because it is already fully priced. Everybody already believes it.

Unless they've all underestimated its potential - which is possible, but unlikely - there isn't much upside left.

You can only get a big crash when investors are optimistic enough to bid up prices. And you can only get a big bull market when they are so gloomy that they have sold off their stocks to record lows.

The big profits are made from big surprises. The opinion that seems too 'far out'...the analysis that comes to the opposite conclusion of most others - those are the investment themes that make money!

Are we wrong to think about the rest of the world - not just markets, but economics, politics, and war too - with the same wary eye?

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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