Is the time of maximum pessimism the best time to buy? Investors around the world have made fortunes buying when “blood is in the streets” in places like Cambodia.
Dateline: An undisclosed location in the USSA
Remember this Time magazine cover from June 2005?
Do you remember what happened shortly after that? The housing crash, followed by the 2008 recession.
Certainly no “maximum pessimism” there.
2005 is about the time that optimism in the housing market was at it’s peak. Realtors were telling gullible consumers that “You can’t go wrong; real estate always goes up!”
This Time magazine cover was a great indicator… to sell.
It seemed that everyone was making money in real estate.
Friends of mine would brag about how they “made” $50,000 in a month because their house appreciated.
Real estate agents were drinking heavy amounts of Kool-Aid. The feeling was that if you weren’t in on the boom, you would be left behind, missing out on real estate riches. A loser, while everyone around you was getting rich.
And then the crash happened and people sobered up. But not for long. Just a few short years later, we find ourselves in a time when the real estate market in many parts of the US is red hot, and the stock market is at record levels.
Plenty of people still believe in the “American Dream”, and “hope and change”.
Since the government and the Federal Reserve can only keep spiking the punch bowl for so long, the party must come to an end at some point.
And when this happens, the country will certainly go through some rough times, as unfunded liabilities become a much bigger issue, and printing money is no longer a workable solution. The average American will get hit hard by the economic downturn, and people will quickly forget about the boom times.
Suddenly, you will be considered crazy to start a business, or invest in something that recently was the picture of a stable long term investment.
Some great fortunes were made starting in a time of great pessimism:
- Bill Gates started Microsoft in the recession of 1973-1975. The company has gone on to generate over $77 billion a year in revenues
- General Electric was founded during the depression of 1873. GE is now an $88 billion company
- Revlon Cosmetics was founded in 1932 during the Great Depression. It now generates over $1 billion in revenue annually.
Taking a look at other investments, we see the trend of pessimism as a good time to buy shining through:
- When gold bottomed out at $252 an ounce in 1999, the negativity surrounding it as an investment was at record levels. Why would you invest in a relic like gold when you could buy booming tech stocks? Then it went on a tear for about 12 years.
- Baron Rothschild, who is given credit for saying “The time to buy is when there’s blood in the streets”, made his fortune buying in the panic that followed the Battle of Waterloo against Napoleon. But that’s not the whole story. The original quote is believed to be “Buy when there’s blood in the streets, even if the blood is your own.“
- Famous investor Sir John Templeton Templeton bought shares of every public European company at the outset of World War II in 1939, including many that were in bankruptcy. And he did this with borrowed money! After four years, he sold the shares for a large profit.
Historically, the difficult part of buying when times are tough and everyone around you is negative is that it can be an extremely lonely place to be. We are naturally social creatures, and to be excluded from the group by forging your own path, and buying something that everyone around you is saying is insane is not an easy thing to do.
But now we have the internet, and sites like this one to help you along with a community of people who do not want to go along with the crowd and end up missing opportunities out of fear.
There’s a lot that goes into this. There are risks that go along with going against the crowd, and research that needs to be done. It’s important to know why the crowd is or isn’t going a certain direction.
For example, I look for international investments that in places that you might not think of – you may know some of my favorites include Cambodia and Nicaragua. I’m even doing an investment conference in Nicaragua for Members of The Nomad Society.
Even places like Iraq offer interesting investment opportunities, even if the average foreigner can’t easily take advantage.
The key is to look for the obvious signs of optimism and pessimism. A Time magazine cover, or CNBC cheerleading a bull market, or a banker advising you to not even think about buying precious metals in this market are signs that you may want to investigate the opposite viewpoint.
We realize the challenges that many in our community face when it comes to investing when pessimism reigns supreme.
This is why I created the Nomad Society, where you get access to my rolodex of trusted experts to help you internationalize your wealth.
All of the great contrarian investors have one thing in common- they let the market bring the deals to them, rather than chasing after deals. By associating with like-minded investors and business people, you have a greater chance of discovering these deals, and enough brainpower to not feel like you’re going completely out on a limb.
