I recently watched the entire Harry Potter film catalogue with my four children. We did a movie a day for eight days and I enjoyed them quite a lot. My eldest, Jack, who is going on 11, was particularly fascinated and had lots of questions.
Having lived through the Potter phenomenon that was the early 2000s, I recalled vividly children and adults dressed as Harry and friends in full Hogwarts regalia. And not just on Halloween!
Concerned that he would get carried away and begin casting spells at school, I had a quick talk with him.
As near as I can remember, I said “Jack, I love that you’re so into this and that I am sharing this with you. That said, I recommend that you not get so caught up in this movie, that you begin going to school dressed as Harry Potter, riding brooms, or fashioning makeshift magic wands at recess.”
My wife, admirably taking up for her beloved boy, interjected “Why can’t he, if that’s what he wants to do?” (That Jack would not attempt any roleplay wizardry during class was understood. He is a conscientious student.) To which I replied “He can. And he can also face the social firing squad that may well follow him until college.”
My wife immediately understood what I was getting at and agreed that we should probably confine the trappings of Harry Potter to home or Halloween.
Was my advice right? I am not sure there is a right answer to that. I only know that I was a nerd, expressed my nerdiness frequently in grade school, and it brought me no joy. My intention was to save my son similar negative attention.
At times, I see a similar spirt animating folk’s savings and investment decisions. They can sometimes get carried away with investments that are considered cool or of the moment and avoid those they deem dated or unpopular. Is this mindset right?
Here I feel there is, in fact, a right answer. The answer is that it is mostly wrong. Investing based on what is popular is exactly what financial bubbles are made of. When asset bubbles burst, there can be real financial damage done to folks who, metaphorically speaking, could not find a seat when the music stopped.
Moreover, assets and even entire asset classes that are out of favor often represent the best values, not in spite of the fact that they are unpopular, but precisely because they are unpopular. It is true that simply because the price of some asset is low, relative to its historical average, that does not, in and of itself, make it a good value.
There have been many once fashionable companies whose fortunes have reversed, irreversibly. Blockbuster Video and Toys R Us are but two prominent recent examples. Put another way, there was never a “right price” to buy them.
If, however, through a careful and commonsense analysis, it appears that the company or industry (or both) will likely survive and ultimately rebound, they might make good candidates for value investing.
In the years that followed the banking and mortgage meltdown of 2008/2009, the stocks of a great many banks were extraordinarily unpopular. This struck me as an opportunity because I could not see any readily available alternative to using banks. So, before any analysis of individual companies, I asked myself several questions such as:
Will people stop using banks? If so, where will they keep their money? In strong boxes? If so, perhaps we should invest in the companies that make strong boxes.
Will people stop borrowing to buy homes and build businesses? If so, in favor of what, perpetual renting and a significant slowdown to innovation?
I think you get the idea.
In the schoolyard we generally want to be either popular or at least fly under the radar and not be unpopular. Most folks do not want to be the object of ridicule or the butt of the joke. We are social animals, and to some extent, what others think of us matters.
In investing, the butt of the joke, the unpopular and the out of style can be exactly what we do want.
If you find yourself disliking an industry or company you should stop and ask yourself why, precisely, you feel that way. If, being honest, your answer is not specific but some form of everyone knows, everyone says so, its common knowledge, etc., you might just be on to something good.
Bernard Baruch said, “Buy straw hats in the winter.”
Warren Buffet said, “Be fearful when people are greedy and be greedy when people are fearful.”
I say, let me pick from the unpopular pile.
Watching a movie and then behaving in unusual ways in public may not be a recipe for social success. Carefully sifting through unpopular investments can certainly be a recipe for financial success.
If you would like help looking for out of favor, undervalued opportunities, consider working with a financial planner who has earned your confidence. As always, be prepared to follow up with meaningful action.
Scott R. McGimpsey February 26th, 2021
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