This is the first part of a two part blog covering some of the best bits of Unconventional wisdom Bagholder has been fortunate enough to obtain in his 30 year investing career.
1. The herd always loses. The value of this cannot be over-estimated, which is why it has been listed first. In my three decades of studying financial markets, there is no easier way to make money, than betting against the herd. Consider this hypothetical. XYZ has a universe of 100 traders. 98 are bullish, 2 are bearish. Lets assume the asset increases in price, even though a rising price in that scenario is near impossible - this is hypothetical.The 98 who were long get to carve up the money from the two who were short. Problem is, when you divide the proceeds from the two into 98 piles, the bulls aren't making hardly any money. Now consider the reverse, XYZ goes bankrupt - the two bears get to carve up all the money from the 98 bulls. In other words, each bear gets paid off by 49 bulls. 49 times your stack - now thats a ripper. It is also why the masses must lose in the long run - even when they are right there is no money to be made. In the mean time, those betting against the masses only need be right once in a while to multiply their wealth. Still not convinced? In or example, the Bears can be wrong 48 times, right once - and make money. The masses however, can be right 48 times, wrong once - and lose money. The real lesson to be taken from this is being on the right side of a trade is only a small piece of the puzzle. The big piece is having the herd on the other side. While most people in the financial markets spend their time trying to be right, those actually making money - are doing it betting opposite the herd.
2. Markets move in a manner that hurts the most participants possible. In a way, this is a corollary of truth above. Examining the history of financial markets, you see this played out, over and over. The tech mania in 1999 had everyone piling in the long side of the Nasdaq, the few who were short - cleaned up. In the mid 2000's everyone was getting long housing. My plumber had 3 homes, my carpet cleaner had 4. With everybody getting long housing in 2005-06, the market was ripe to crash- and crash it did. Scanning the financial markets today for "lopsided" trades, there are a couple obvious ones. The Bond Market and the Gold Market. My local Chase branch is offering 13 month CD's with a return of .8%. I hand them a thousand dollars, 13 months from now I get back $1008, and a tax bill for 1/3 of the $8 profit. No rational thinking individual would make that trade. And yet, pension funds, retirees, foreign countries - just to name a few, are all piling on the long side of that trade. Are they all irrational? In a word, yes. The reasons are psychological in nature. Man is a linear thinking individual. This means he looks at the past, and extrapolates it into the future. He sees positive returns for decades, and so he has been conditioned (much like a lab rat) to think the positive returns will continue indefinitely. Anyone looking at the bond market today has watched it go up for so long now, they are absolutely hypnotized. They are like religious zealots, all the contrary evidence in the world (like .8%) won't get them to change their mind. Much like the housing market of 05-06, todays bond market looks ripe to crash.
3. Conventional wisdom is anything but. All Markets are rigged. Stock market, Gold market, or the market for 1916-D dimes; it really makes no difference. Sometimes the price is rigged too high, sometimes too low. Sometimes the rigging is short term, other times its long term. Make no mistake though, all markets are rigged in a manner designed to pick the pockets of the masses. In any given market, there are players who because of their size and resources effectively control that market. They have an angle. They know before the smaller participants which way a market is headed. When you consider some of the larger markets on the planet (like Gold) the players who control that market have more than enough money to get the MSM to trumpet whatever they want as "conventional wisdom". Think of the 1970's - mass inflation, oil embargo, energy crisis, sky high interest rates. You could hardly dream up a more bullish scenario for Gold - or a more bearish one for bonds. Conventional wisdom by 1980, thanks to a decade of escalating inflation had the effect of getting anybody even remotely interested in the Gold Market onto the LONG side of the trade, while simultaneously scaring them out of their Bonds. Conventional wisdom was wrong on both counts then, just as its wrong today. Todays wisdom: Gold is in a bubble. With fresh memories of other popping bubbles, joe everyman thinks "I don't want anything to do with another bubble - I better stay away from Gold." Those of us skeptical of the conventional wisdom have to ask … Is Gold really in a bubble, or are market makers paying their MSM friends to scare people away - thus keeping the trade lopsided?
4. The key to multiplying wealth is understanding how Bull markets progress. Bull markets are a product of the paper aristocracy. They create them for the purpose of adding zeroes to their wealth. Since you can't create bull markets, the best chance you have to multiply your wealth is to identify a Bull market early, layer into a position, and sit tight. Bull markets have 3 phases. First is accumulation (buying) by those in the know. Second is the run-up in price which (if properly managed) slowly sucks in the masses. The last phase is the distribution (selling) by those in the know to the ignorant masses. Bull markets tend to run for a generation (18-30 years). The reason is, it takes a generation of paper aristocracy conditioning - to get the masses all on the wrong side of a trade. When Bulls are first born, they progress at a relatively steady rate - often finding support at the 200 day moving average. . The advances are punctuated by very sharp pullbacks which will often wipeout months of gains in only a week or two. Price action like that shakes out all but the staunchest of bulls, while trapping greedy Bears. As bull markets age, the rate of price appreciation increases. By the end of the Bull market, participation will be widespread. A deep understanding of how bull markets progress is the key to identifying them while still in the accumulation phase (before the run-up in price). The 21st century Gold bull is now 11 years old & it is still in the accumulation phase. Considering the blueprint laid out here, its easy to see how this Gold bull could easily run for another 15 years.
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