Never underestimate the logic and the power of the bleeding obvious.
In an era of dark pools, high frequency trading, technical analysis, impenetrable calculations over market risk and portfolio allocations, there is only one sure way to make money from trading. It can be summed up as thus: buy low and sell high.
Back in the 1980s, there was a slightly different variation on the theme and the catch cry among traders at the fast end of the stock market was, "buy, lie and sell high”. Essentially, though, it was the same strategy with a twist.
Not surprisingly, the middle part was outlawed by regulatory authorities after the great crash of 1987, when it was discovered that most of the inflated stock values were based on some fairly spurious claims.
As simple as the strategy sounds, picking the trend can often be difficult and usually it means taking the opposite tack to the rest of the pack, to be a contrarian. Prices are at their lowest when everyone else is selling.
Media tycoon Kerry Packer was a great believer in this simple test. He was said to be dyslexic, unable to focus on reading or numbers. ("That’s why you employ a secretary and an accountant,” his father Sir Frank is reported as saying.) But as one of Australia’s most successful entrepreneurs, business managers and traders, he clearly had his smarts about him, with an innate sense as to whether something had the potential to grow.
Unlike a lot of investors, he wasn’t afraid to sell, to take a profit when he figured he’d been offered a ridiculous amount of money. And despite the family history in the business, he didn’t allow that simple bit of logic, that bleedingly obvious strategy, to be clouded by emotion when he sold the Nine Network to Alan Bond.
Mind you, he had a simple strategy laid out to resume control on the cheap, paving the way for his son James to do exactly the same thing 20 years later when he sold the family jewels to private equity group CVC at the top of the market.
On both occasions, the buyers for Nine were surrounded by an army of advisors, providing a mountain of technical analysis to justify the ridiculous prices. And on both occasions, the network was sold during a bubble, when there was a rush for Australian media assets.
It isn’t always easy being a contrarian and let’s face it, straw hats really aren’t that attractive, even in summer. But they are cheaper in winter, that’s for sure.
Berkshire Hathaway founder Warren Buffett is a great believer in the concept. He buys when everyone else decides it is time to sell. You should think about it too.