Mom and Pop Get It Wrong In All Markets, Time And Again

“Villa and White felt “sucker punched” when stocks collapsed in 2008, he reports. The crash “wiped out half their savings.” They sold out of stocks, put their money in the bank, and “swore off stocks,” presumably forever.
Last month, as the Standard & Poor’s 500 index surged to new highs, they hired a new financial adviser and plunged into the stock market again.
The problem with Villa and White isn’t that they are unusual but that they are absolutely the typical American investor. Both of them are doctors, meaning they are presumably intelligent and educated. And yet they insist on investing like absolute fools.”

“They buy high, sell low, and the ending is predictable.”
“Share prices fall because there are more sellers than buyers. They rise because of the reverse. So mom and pop investors like the Villa-Whites rush to dump their stocks because they see the market plummeting, oblivious to the fact that the only reason it’s falling is because people like them are rushing to dump their stocks.”
– from ‘Mom and pop: The world’s worst investors’, WSJ Marketwatch, 4 Apr 2013

And so it is with all markets.
Regular folks (in the case of RE, the vast, vast majority of market participants) fell in love with Vancouver RE when prices started running up, became more and more adoring as they ran up more, and were most infatuated at the frothy peak (at the very time they should have been most wary). It is this crescendo of infatuation that drives speculative manias to their ridiculous heights.
As prices fall folks will become less enamoured, then discouraged, then disgusted by local RE, and when the most people are the most disgusted, it’ll be a sensible time to buy.
It’s not rocket-science, but it is emotionally very, very difficult to be a contrarian, and to take a position that is the opposite of that of the crowd.
– vreaa

46 responses to “Mom and Pop Get It Wrong In All Markets, Time And Again

  1. Similarly, when asking folks if they think something is a good investment, one often hears: “Yes, it’s been going up a lot”. As if past performance were predictive of future performance, and as if something that is now more expensive were a better buy.

  2. Ralph Cramdown

    It’s pretty easy to be a contrarian, actually. You just have to look at the world in terms of cash flows rather than asset prices. That is all.

    • Cyril Tourneur

      True, and then you see that right now there just aren’t too many good places to put your money.

      • Ralph Cramdown

        Yes, it’s a terrible environment when the incumbent national telecom’s common are only yielding 280% of 10 year Canadas. What kind of an idiot would buy a solid dividend grower that’s only paying 5%? Come to think of it, what kind of idiot bought them when they were yielding 5.5%? My kind of idiot, that’s what kind. When everything’s sunny and they’re only yielding 4%, I’ll sell some to you…. maybe.

      • “When everything’s sunny and they’re only yielding 4%, I’ll sell some to you…. maybe.”

        Telus and Rogers common are currently yielding 3.7% and 3.4%, respectively. Which telecoms are you referring to?

      • Ralph Cramdown

        Geez, Ninja, it’s a pretty short list. You’ve already done most of the work, so I wouldn’t want to steal your thunder by blurting out the answer.

        Here’s my read: For ANY investment right now, there’s lots of folk who’ll say it’s unsustainable and current buyers are fools. But these are the same folk who are in bonds and moaning that they’re losing capital to inflation. Poor sobs.

        I don’t want anyone to get the wrong idea about the incumbent telecom: I don’t consider it a screaming buy among all others. But I think it’s pretty safe, likely to grow over the long term, and I shouldn’t really need to argue about its safety with random wankers because a) it’s the definition of “widows and orphans” stock” and b) unless the wankers have a theory about customers not paying their bills anymore….

        I bought some of the incumbent telecom late last week, at 5% and a P/E of 13.6, but I also bought an oil pumper paying 12 3/4% at a P/E of 6.6. Does anyone think I care if their stock prices go up? Sure, it would be nice, but I’d be perfectly content if prices didn’t budge until the day I die.

      • “I wouldn’t want to steal your thunder by blurting out the answer.”

        Um, maybe because you don’t have one?

        12.75%, eh? There is a name for such a stock: dividend trap. Your payout is going to get cut. By a lot.

      • The higher the yield, the higher the risk. Its a simple game:)

      • Ralph Cramdown

        Name a date at a decent point in the future and we can see how my investments in BCE and MMT did. If you want to make things interesting, pick two investments that you’re in and their values as of yesterday.

    • Real Estate Tsunami

      As a contrarian, you may never get the top gains, but you will rarely suffer devastating losses.

  3. When the stock market crashed in 2008, I started down the same path as this couple, but I asked my financial advisor what to do, instead of telling her “sell”. She explained to me then about the cyclical nature of markets, and that selling then would be the worst thing I could do. I’m glad I listened, because I didn’t lose any money, thankfully.
    That was also the turning point in my views on RE, and I have been a “contrarian” since. Especially since even at the late 2008/early 2009 prices, houses were already too expensive compared to renting. And ithas just gotten worse…

  4. Don’t be a sheep, like 99% of the population.

  5. Not to be obtuse, but the idea “Share prices fall because there are more sellers than buyers. They rise because of the reverse” always irks me. There are always equal amounts of buyers and sellers. When a seller sells, he sells to a buyer. The same amount of the asset he was selling exits, he doesn’t sell it and then it self-destructs or something. It’s always held by someone.

    Asset prices rise and fall because of sentiment.

    • I agree with your initial point; it would be better to talk about buying or selling pressure.

      Which means that contrarians look to buy when there are extremes of selling pressure, and to sell when there are extremes of buying pressure.

      • Like gold stock right now. I love juniors. Giddy-up silver!

      • Farmer: Are you being serious, or just pulling our legs in a good natured fashion?
        (I say this in light of our friendly exchanges about the asset-class-that-can’t-be-named and in view of the fact that junior gold miners are indeed very ‘oversold’.)

      • Dead serious. I think the bottom is in for the miners. The weaks have been shaken right out of the tree (which was pretty much the goal for those betting on an outstanding upside bounce). I have only been a g**d bear for as long as I predicted prices would keep falling. It is now my belief the stage is set for the serious players to get back in the game and there is impetus behind a move shifting out of paper trade ETF’s and into equities (small caps and juniors) as that is where the next really big moves will materialize. We live in an equities world with all the stimulus in play. Holders of physical PM’s have been thouroughly punished this past two years for not understanding this dynamic. In the process the shares of many good companies got beaten to ratshit and they were really just collateral damage to teach to loony camp of gold bugs to get in line or get out of the market altogether. I believe the upside ahead for mining shares willl be nothing less than spectacular. Just my personal point of view. We have seen this play out before. It is a generational buying opportunity that will only be enjoyed by the few willing to step off the ledge at the moment of greatest negativity and fear and begin harvesting the fruit of this wonderful Canadian resource sector.

        So I am putting my money where my mouth is Vreaa. I just turned bullish.

      • ..and I agree with you, completely.
        One of the three spectacularly good buying opportunities in this sector in the last 14 years.
        But one needs to be a very tenacious contrarian to notice, and even more so to act.

      • Buying now takes guts. No question about it. Still, you can’t get a better deal than some companies are offering when shares trade below cash and asset values. (keeping in mind that ore in the ground is only worth as much as the market will pay in the future and falling PM prices don’t improve balance sheets). But unless you believe gold prices will be pummelled into oblivion in the future forcing even some of the big miners to shut down then there is likely still value to be had. Not a really big concern if you are studious in your selections and choose those with solid balance sheets, operational earnings (profits) and a reasonable hope of being acquired by a bigger player. I am referring to juniors and small caps of course. Even at current punished metals prices most good mines remain profitable. The huge gulf that currently exists between mining shares and the price of g**d can be closed without g**d even moving one inch higher. I mean to say that equities can be invested at this stage and will have better than average odds of performing off the current lows DESPITE a rangebound metals market. They are just that stupidly cheap. Of course, a nice bounce in metals off the current lows would send some of the plays stratospheric. I suppose it is about estimating the odds and probabilities right now. It sure beats the hell out of gambling on slot machines or buying 6/49 tickets though!!

      • Real Estate Tsunami

        Farmer, will you be changing your name to Miner. 🙂

      • Sounds like a good idea, RET. I can’t seem to concentrate on real estate lately. My brain is fickle unit on subjects with unhappy endings. Even farming talk puts me off lately with all the news about the beginnings of a new bird flu epidemic in China (bad time to start a big hog or chicken operation by the way so avoid those two kids!). Buying mining shares seems like a good distraction for a change. Everything else is so depressing lately. On a bright note I now have a home built solar oven. Very cool. Cardboard boxes, duct tape, black paint, aluminum foil and a piece of string were all I needed. Basically it is made from household junk and recycles. The internet tells me I can cook stew in the damn thing. Just waiting for the sun to come out so I can give it a test drive!!

      • Farmer -> Regarding your parabolic cooker: I read recently about how one can start a fire with a sodacan/beercan and… chocolate!
        You use the chocolate as an abrasive on a scrap of rag to polish the concave end of the can, into a parabolic mirror. It takes 15 to 60 min. Then use the sun’s rays* and kindling to start your fire.

        * = Vancouver residents will note a problem with this step.

      • Chocolate as an abrasive? I love it. Who invents all these things anyway? There are really some geniuses out there to come up with a way to build fires out of soda cans and chocolate. You just know I have to try it out.

        … I can burn my mortgage of course!

    • This always takes a bit of reasoning. The author is right in the sense that when SHTF, there will be a sudden surge of sellers on the market to sell their stocks. Since the supply (seller) side overwhelms the demand (buyer) side immediately, the lowest asking price will be picked up first. As the latest sales price is reflected on the price of the stock, more sellers panic and drop their prices further, further bringing out more buyers who sees good values.

      So yes, there are always more sellers than buyers when price drops, but buyers will come out in numbers to scoop up the stocks on sales. The transactions will always cause the number of sellers equal to the number of buyers.

    • Real Estate Tsunami

      Agreed. Life is a zero sum game.

      • Number of seller transactions = buyer transactions, naturally. But what about number who WANT to sell vs buy? That is how booms and busts happen.
        Especially in such an illiquid, emotional market as RE, fraught with bad advice from the media, RE “experts”, and agents, and random people with no awareness of anything other than the 30 year long building of a monumental credit bubble. And to be fair, RE bears who were a little too early!
        Being early is much the same as being wrong, unless you are renting a comfortable affordable and otherwise saving and investing, of course…

    • There are not always an equal number of buyers and sellers. One counterparty could be doing all the buying while everyone else is selling if the buyer has deep enough pockets. This is where the concept of “smart money” or “high-powered money” comes from.

      Also, consider the US Fed and their QE purchases of debt assets from the commercial banks and other central banks for example. Or any historical “cornering of the market” by a sole buyer or small number of buyers.

      • The point is, someone is always holding the asset, it doesn’t disappear. If you listen CNBC or read financial news you may get the impression that sometimes everyone sells one asset to buy another asset. That isn’t what happens.

      • Alexcanuck

        Assets DO disappear. All the time, yet they just get dropped from indexes, the index gets re-calibrated as if that particular company never existed, and life goes on.

    • There are not always the same number of buyers Vs seller dynamics. Short selling changes demand.

      Naked short selling, which brought down companies lie Enron, Lehamn, Bear Stern, etc. sped up eventuality by skewing buy/sell demand. Speculators, mostly hedge funds, were asking their brokers to sell shares of these companies even when they didn’t hold such shares, which led to their demise.

      Naked short selling is banned now but traditional short selling (where shares have to be ‘rented’ first before selling) is extremely common and part of many institutional investor’s modus operandi.

      That’s why when retail investors like Ralph Cramdown think they have beat the market by identifying value, it is very dangerous.

      Equity is nothing but paper that represents your share of the company’s expected future profit. That’s like buying a house for ‘only’ a share of the future rental income without the house itself!

      • “That’s like buying a house for ‘only’ a share of the future rental income without the house itself!”

        Um, no. Shareholders own a firm’s assets. Debtholders are senior, but once debts are paid, whatever’s left belongs to the shareholders. Like a house with a paid-off mortgage.

      • “Debtholders are senior, but once debts are paid, whatever’s left belongs to the shareholders.”

        Which usually means nothing or pennies on the dollar in the odd case.

      • “In the odd case”, BLM? You are a master of BS.

      • El Ninja – take a look at Nortel and Bre-X equity sharholders. Nada. When companies declare bankruptcy it pretty much means they have more debt than equity.

        Very few quality public companies blow up, and I would argue most are much more creditworthy than any individual, so they are safer in the respect of diversification.

        However, stocks are as succesptible to loose money as Van RE. Maybe more so. Without the utility value.

      • The vast majority of all companies carry debt, Ninja. Typically those running into trouble carry very excessive debt relative to assets and income streams. On settlement day following the collapse of an issue or company insolvency this is virtually ALWAYS the case. That is another way of stating that companies don’t tend to fail when they have plenty of money in the bank and a solid balance sheet. So BLM is correct when he says that shareholder value is worth nothing or mere pennies on the dollar. It is the remainder of assets, usually representing a just fraction of the difference between assets and liabilities that are divided amongst senior creditors and the bondholders. Typically nothing remains for shareholders but tears and regrets.

      • This is why the LGD (loss given default) is just as important as the EDF (expected default frequency or probability of default) when bond holders are assessing a firm’s credit risk. Often, after a default, bond holders are paid less than 50 cents on the dollar for junk credit.

      • –> BLM and Farmer:

        You guys talk a lot of smoke… how about some facts and figures? Most public companies carry debt, yes. However, most companies are not excessively levered. The average debt-to-capital ratio of the S&P 500 is 36%. So, your “pennies of the dollar” actually works out to 64 cents–and that’s only if there were to go bankrupt. Most are healthy, going concerns.

      • El Ninja – by and large most blue chip companies are safe and well managed. But every company is only a scandal away from seeing their fortunes disappear.

        Few companies go from being highly rated to bankruptcy overnight. Those that do are spectacular. Most slowly descend into bankruptcy and every step along the way puts shareholders into a dilemma of whether to sell or hold. RIM and Nortel were both great picks at one point. Bell Canada is no more solid that those companies at their peak.

        Investing in shares is placing your faith in the people who run the company. They’re human too, who can make mistakes. Business opportunities are fleeting in nature. Don’t be so sure on dividends.

  6. A Crescendo ‘O Infatuation CautionaryTale…

    [UK DailyMail] – Looking THIS wacky doesn’t come cheap! Lady Gaga admits she went bankrupt after spending millions on tour costumes

    ‘And I remember I called everybody and said, “Why is everyone saying I have no money? This is ridiculous, I have five No. 1 singles” — and they said, “Well, you’re $3m in debt.” ‘

    [NoteToEd: On the BrighterSide, some of those costumes were apparently edible.]

  7. Carioca Canuck

    Here’s a perfect example of what we’re talking about. This house is down the street from where we live here in Calgary. I drive past it twice a day. It was first put on the market by it’s recent owner about 9 months ago with a different realtor for $1.2MM……..then delisted……then relisted with a new realtor 6 months ago @1.09MM………then $999K when the CMHC mortgage changes occurred…….then $979K…….$949K…….$929K………$909K…….and now it’s going begging @ $899K……..and when compared to the rest of the overpriced comps, it is still about $150K too high IMHO.

    Funniest part of the whole add is that it has a “Carriage House” which is a small apartment on the roof of the garage in the back alley. The ad says it is legally tenanted at $930 a month, yet for the last year I have never seen a light on in the place every time I drive by. Funny ‘dat……..I didn’t know ghosts could rent. And, when you can rent a downtown high rise apartment for the same amount of money, why on earth would you want to live in a garage roof flat in the middle of nowhere for just as much money ?

    • UBCghettodweller

      > why on earth would you want to live in a garage roof flat in the middle of nowhere for just as much money ?

      Not only that, it’s way out in the middle of nowheresville by Calgary standards! At best they’ll get some MRC student who waited to long to find decent housing.

      Although the Weaselhead and Glenmore reservoir are beautiful even during the brown months.

      • Garrison Green is the middle of nowhere? That’s like saying South Vancouver is the middle of nowhere. I mean it must be a brutal commute living 40 blocks from central downtown!

      • CanuckDownUnder

        Sorry Airedales, anything south of 33 Ave S and you may as well be in Okotoks! 🙂

      • Real Estate Tsunami

        Guys, start you own Calgary Real Estate Anectote Archive.
        Weasel head, eh!

  8. Wall Street Journal…? Yeah, let’s cry for the poor, poor American Doctors and their bad investment decisions. Boo-hoo….

    WSJ should just go back its regularly scheduled programming of claiming POTUS is a closet commie….

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