The Rule of Opposites

I am currently reading The Intelligent Investor by Benjamin Graham and I thought this concept deserved some attention.

The rule of opposites is basically this…

“The more enthusiastic investors become about the stock market in the long run, the more certain they are to be proved wrong in the short run”

Buy low, sell high is the best strategy for any type of arbitrage, but our emotions end up making us do the exact opposite of that strategy. We get excited when we see stocks going up so we buy them on the way up. Then we let fear rule when we see stocks going down so we start selling.

The smart investor will actually do the opposite. Start selling stocks as their prices rise, and buy stocks that have fallen in price. Simple theory, hard to practice.

The flip side is the same. When everyone is predicting an awful bear market you have to think twice. Bear markets simply mean stocks go on sale.

As Jason Zweig would put it, “Considering how calamitously wrong the “experts” were the last time they agreed on something, why on earth should the intelligent investor believe them now?” Being a contrarian is one of the best ways, if not the only way, to profit in the stock market.