First, know this: The US economy and financial markets are not a tank. They are undergoing a massive change that will not only provide investment opportunities, but also economic improvements that we have not seen in recent years.

Why and how will these opportunities and improvements occur?

I am writing articles explaining this rebuilding process. However, they are gradual articles. It would take a book to give a thorough explanation. The problem is, if you saw, “The Complete Explanation,” by John S. Tobey, CFA, your first (and last) thought would be: “Who is this guy? Why does he think he has the exact attitude everyone else is missing? Phooey!”

So how do I explain how one can formulate and act on a well-timed, contrarian view when the prevailing trend seems irreversible. Let me try a different approach, by describing what successful contrarian investment thinking requires:

  • First, accumulate knowledge over current events and institutional education. A particularly good source are older, well-written books that use past events to reveal investment truths. Without current news and emotions clouding the issues, a true understanding can be learned.
  • Second, focus on investing. While investment developments and trends may share some similarities over time, the differences are always numerous. Furthermore, what is important at one time may be unimportant at another. So, be curious, focus on developments and be willing to change analytical approaches.
  • Third, build extensive experience. “Build” means experiment, adjust, evolve and act. While investment environments inevitably change, experience provides helpful investment understanding – a kind of intuition.
  • Fourth, innovation. When potential is believed, opposite change is underway, the question is what to do about it. A good strategy is likely to be a different approach from the previous trend.
  • Fifth, once a conflicting view is formed, continue to test your thought process as new facts and events come into play. That will strengthen your resolve.
  • Sixth, don’t fall into the mindset that is always contradictory. Being contrarian at the right time provides the value. Being a perpetual naysayer is not.

Today’s contrarian fundamentals:

First, the Federal Reserve made a huge mistake that overrode the primary role of the capital market in setting interest rates. Worse, by keeping interest rates close to 0% for a decade, the Fed “educated” investors into the notion that the Fed was doing something right, so rate hikes must be the inflation battle bad today.

Second, there is a widespread misconception about inflation:

  • What – fiat (AKA, paper) money is eroding – not just rising prices
  • How to measure it correctly – especially don’t rely on the highest 12 month movement number
  • What are the benefits – stock prices, earnings and dividends are based on non-inflation adjusted numbers (so don’t use inflation-adjusted GDP growth as a measure of stock market strength/weakness)

Third, the news is almost entirely negative – what’s wrong and why that means an inevitable stock market recession and crash.

As I mentioned in my last article, it is a rule: When “everyone” in negative, the bottom is here or near.

The bottom line: Don’t bet against common sense

“Common sense” plays a big part in the contrarian idea because common reasoning at bottoms (and tops) is not always there. Instead, trivial explanations are created to support the belief that things are not overworked.

A helpful sign that the work lacks common sense is when you have absolutes feeling that the current trend is here to stay. (At such times, even professional investors get those misguided feelings.)



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