Investment Blog

The best investments are those which are rejected by the majority.

Sounds counter-intuitive? But this is exactly how above-average returns are generated by smart investors.

In the world of investments, something that becomes popular, with all the positive press around it, is chased by many investors. The more money flows to that investment “opportunity”, the higher the prices go up. Rapidly rising prices lure more investors who are drawn by the fear of missing out (FOMO) and consequently boost the prices further up to an expensive zone where all the positive outcomes are more than priced in, leaving no room for negative surprises.

The completely opposite story plays out for unpopular investments which are subjected to relentless negative news. It is shunned by investors. The more money flows out of that investment “sinkhole”, the more the prices go down. Rapidly falling prices frighten more investors who sell due to the fear of losing money (loss aversion) and consequently crash the prices further down to a discounted zone where all the negatives are more than priced in, leaving no room for positive surprises.

But as in life, there are good and bad days in the investment market. Emotions of greed on good days make the prices extremely expensive and fear makes the prices extremely cheap from their fair value, which is unsustainable.

Smart investors understand these human follies and take advantage of the crowd’s behavior. Something that is subjected to a barrage of positive news has hardly any juice left for investors and thus becomes a bad investment. On the contrary, relentless negative news takes down the prices much below the fair value an asset deserves and thus becomes a good investment.

For example, the Indian IT sector was subjected to a lot of negative news after Trump wanted to clamp down on outsourcing in 2017. We realized the prices went much below the fair valuation and invested to generate handsome returns over the next few years. Another example, we advised our clients to not consider popular start-up IPOs last year for long-term investments and it played out well.

Therefore, it pays to objectively look for opportunities in the areas which are rejected by the majority and take a smart exit that is popular among the majority.

Going against the herd with your eyes wide open pays handsomely most of the time. The key is to have conviction in your call and patience to let it play out. 

Originally posted on LinkedIn: www.linkedin.com/sumitduseja