The Investment U E-Letter: #345
Tuesday, June 15, 2004 The Trouble With Everyone…
And How to Keep the Curse of Lyford Cay from Harming Your Portfolio
By Dr. Steve Sjuggerud
President, Investment U I spent last week talking about investing at a private retreat with some of the most important names in the investment newsletter business… Everyone there, it seemed, expected the stock market to go down over the coming year. And everyone, it seemed, expected long-term interest rates to go up. If all the experts agree, then the logical path for you to take as an investor is obvious, right? You'd invest expecting stocks to fall and long-term rates to rise, no? But don't start making those portfolio adjustments just yet… Here's why… When Everyone Agrees, It's Time to Consider the Opposite J. Paul Getty was the richest man in the world when he wrote his book How to Be Rich. In his first chapter, "How I Made My First Billion," he says: "In business, as in politics, it is never easy to go against the beliefs and attitudes held by the majority." Even Getty's friends thought he was crazy when, in the midst of the Great Depression, he started making large-scale purchases to build an oil empire. But Getty knew exactly what he was doing… He was going against… everyone. As I sat at this private gathering and heard everyone repeat "stocks are going down and long-term rates are going up," I thought of Barton Biggs… the "old man" of Morgan Stanley, who used to report on Morgan Stanley's private investor meetings. Every year, Morgan Stanley gathers the world's best thinkers on the topic of money for a private powwow at Lyford Cay, Bahamas, to trade ideas. Morgan Stanley has been hosting "Lyford Cay" for nearly two decades. Barton Biggs has probably attended most of those meetings. And I believe it was Barton who coined the phrase "The Curse of Lyford Cay." Barton noticed every year that, whenever there was a strong consensus that one thing would happen, invariably, the opposite would happen. And Barton called this trouble with everyone believing the same thing, only to see the opposite thing happen, "The Curse of Lyford Cay." Thinking about the Curse of Lyford Cay, I wondered if our private gathering would have the same curse… If it did, then stocks will rise again this year, against the odds, and long-term interest rates will NOT go up. My Thoughts on Our Curse I kept to myself on the topic oflong-term interest rates at the conference. I personally think that everyone expects long-term interest rates to rise, and that is already priced into interest rates - therefore they won't rise much higher. It's convoluted logic, I know… But with J. Paul Getty's thinking, I feel I'll be okay. I have no bets on the table on a rise in long-term interest rates. It wouldn't surprise me at all if long-term rates didn't end up rising, or even fell some. On the stock market, it's a difficult call. Everyone in this group was bearish, but it's a crowd that's normally bearish, quite frankly. However, among the wider surveys of investors, we still see a remarkable level of bullishness… For example, in the latest AAII poll of individual investors, only 15% expect the stock market to fall over the next 12 months. While the signals are mixed on the stock market, to me, it is clear that everyone (both at our private gathering and outside) expects higher interest rates. And there's the trouble with everyone… If Barton Biggs is right, then it's time for the Curse of Lyford Cay to rear its head. If everyone you know believes that long-term interest rates are headed higher (for example), then a bet on the opposite outcome may well be the much better bet. Today's IU Cribsheet - For more on contrary thinking, you may want to consider the book The Triumph of Contrarian Investing, by Ned Davis.
Good investing, Steve Related Articles: Investment U Archives
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