Extrapolation, contrarianism… and an investing short-cut

Why buy when everyone else is excited and the share price is already sky-high? It can pay to be contrarian.

A happy woman having a swim in a pool in the middle of a frozen lake.

Image source: Getty Images

It’s cold here in the NSW Southern Highlands today.

When I woke up, it was -3C.

No snow, unfortunately, much to my young bloke’s chagrin.

As I type this, it’s +3C.

Not a big range… and a good day to be inside.

The open fire is cranked up. The heater is on.

Only last week, it was 16 degrees.

I’ve done the numbers.

I’ve drawn the charts.

16 degrees last week.

3 degrees today.

By this time next week, it’ll be -10C.

Yes, I’m kidding.

But it’s a good reminder not to extrapolate, right?

So why do we do it with share prices?

We shouldn’t, of course. The market’s machinations are interesting, but not necessarily instructive.

Speaking of which, now would be a good time to order a new pool. 

No, not because I’m keen on training for the Bondi Icebergs. 

But because no one else is thinking of swimming pools right now.

By the time they are, the pool salespeople will be flat out, and no one will be offering me a cracking deal.

It can pay to be contrarian.

The same goes for shares — why buy when everyone else is excited about a company, and the share price is already sky-high?

More importantly, don’t sell when share prices are low because the market is in a flap, particularly if the problem is transitory.

(That lesson was most recently learned in the aftermath of the COVID crash in March 2020. The ASX is up 52% since then.)

These are — to a greater or lesser degree — exercises in pattern recognition (and in knowing what ‘patterns’ to ignore).

One other pattern is something of a template.

See stock picking is hard. And there are no points for ‘originality’ — only for being right.

But one way of shortening our odds is to find those patterns.

Like, for example, a business model that’s been successful elsewhere that might be successful here. It’s the stock market version of the ‘here’s one I prepared earlier’ line from the old cooking shows.

Or, it can be a business model which has worked here, but which is being exported elsewhere.

A company might have seen it done before and knows the game plan.

As investors, we’ve seen it before too. And nothing is a carbon copy, but there’s nothing like experience as a teacher.

One such company was the subject of this week’s Motley Fool Stock of the Week on YouTube, released just yesterday.

I sat down and talked to Motley Fool analyst Chris Copley about a Buy recommendation that is doing precisely that — and one he thinks has a good chance of being a long term market-beater.

Check it out on YouTube, now.

Now, if you’ll excuse me, I’m going to throw another log on the fire… the temperature just dropped another notch.

Fool on!

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*Returns as of May 24th 2021

Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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