Fade the Crowd

Editor's note: In investing, the crowd is usually wrong. Once the masses start pouring into an investment – as we're currently seeing with government debt – the easy money is almost certainly gone, and it's time to move on. Going against the crowd, or being a contrarian, is the best way to make money in the stock market. Below, Porter explains how the crowd is currently bearish… and why he's diving into stocks.

Fade the Crowd

By Porter Stansberry

From the December 8, 2008, S&A Digest

At last year's S&A Alliance Conference in Cancun, Mexico, one of our analysts told the story of "little tiny, baby pine trees." He based his investment idea on the reforestation of British Columbia, where the pine beetle has devastated the forest. The audience was so excited about stocks and so bullish, hundreds of people rushed from their seats to get to a phone to place an order for the stock. Others simply pushed a few buttons on their cell phones to make the trade.

I laughed out loud during the presentation. I thought the idea was crazy. How do you maintain a competitive advantage if you're selling pine trees? Nobody paid any attention to me. The audience overwhelmingly voted pine trees as the best investment idea of the meeting. Dan Ferris' best idea received virtually no votes – buying shares of Wal-Mart. Since then, the baby pine tree stock has fallen from more than $9 to $1. Wal-Mart was one of the few stocks in the world to go up this year.

You might wonder why I bring this up. Am I trying to bash our best customers? Am I trying to embarrass one of my analysts? No, of course not. (You should know my best idea at the Alliance meeting last year was buying Moody's for less than $32 – advice that would have cost you money, too.) I bring up this story because crowds of people tend to be wrong about stocks. I was skeptical of the pine tree company. But I was 100% certain it would be a disaster when I saw how the audience reacted.

If you want to be successful in the markets, fade the crowds. Ignore what's popular. Do your best to buy when other people are afraid. Do your best to sell when everyone rushes into the market.

The audience's mood at this year's S&A Alliance Conference was totally different. Everyone was very quiet. Very subdued. Several subscribers I met recently left jobs in finance. Many other subscribers were nervous they might soon lose their jobs, too. Most subscribers had lost money in stocks over the last few years. They were skeptical. They were afraid. And no one rushed out of the room to buy anything. In fact, I'm certain no one at our meeting was planning to buy stocks at all.

The analyst who pitched the pine trees last year is so afraid of the market this year he could barely speak. He seemed visibly frightened. In a voice that didn't rise above a whisper, he told the audience about a family member who'd been wiped out by the collapse of Lehman Brothers. Then, after talking about touring a safe Hong Kong REIT that's yielding nearly 20% annually, he told our audience they shouldn't be buying securities at all. Only cash and gold. Next came an analyst who is convinced a global deflation is underway and prices for commodities, real estate, and stocks will continue to decline.

It was very depressing. Until the professional investors spoke... We hosted three professional investors. Rahul Saraogi runs a hedge fund in India. Peter Churchouse runs a property-centric hedge fund in Hong Kong and was Morgan Stanley's research chief in Asia for 20 years. And our "mystery" guest was Eduardo Elsztain, the head of the Cresud group of companies in Argentina.

All of the professionals were bullish. Saraogi pointed out he's buying solid companies in India for around one year of earnings. Churchouse explained Asian property stocks have never been this cheap. And Elsztain explained why he was raising a private fund to buy real estate in the United States for the first time ever.

What do I think? The analysts on my team with the most experience – Sjuggerud, Ferris, Clark, and myself – are bullish. The professionals are bullish. My audience and several of my newer analysts are bearish – and downright panicked. Remember: Fade the crowd.