Contrarian Investing: Buy and Sell When Others Won't and Make Money Doing It
By Anthony Gallea and William Patalon III
(Simon & Schuster, $25)
Daring readers to go against the grain
Reviewed by Teresa McUsic
As Wall Street's bull market continues its run, the stock market seemingly is setting new records on a weekly _ if not daily _ basis.
Low inflation, low unemployment, high productivity and surging earnings have combined to put the Dow Jones Industrial Average on the fast track upward, propelling it to levels far beyond where it was six months ago, when Federal Reserve chairman Alan Greenspan warned investors of "irrational exuberance" in the stock market.
Even concerns over a shaky Asian economy have done little to slow the stock market juggernaut. And for two authors, the upward trend should lead investors to a single conclusion: It's time to sell.
Anthony Gallea and William Patalon III make the case that the best long-term investments are the ones that initially run against the grain of conventional wisdom and popular opinion.
Instead of trying to catch the wave of a red-hot stock that already has started to climb in price, Gallea and Patalon urge individuals to cast their sights on investment vehicles that have fallen out of favor. The pair challenges readers to think independently of the investment crowd in an attempt to truly practice the Wall Street mantra: buy low, sell high.
"The smart investor _ the one who does not consider himself a financial genius, but trains himself to analyze the magazines and television and to pick tops and bottoms by the extremes in public attitude _ learns to buy fear and panic and to sell greed and euphoria," the authors write.
Gallea, a senior portfolio management director for Smith Barney, and Patalon, a business reporter in the Gannett Co. newspaper chain, combine to serve up a dose of financial advice that strikes an appealing middle ground. While focusing on a set of easy-to-understand messages that investors can take to heart while making financial decisions, the book offers the historical and statistical evidence to support its claims.
The authors offer up a set of guidelines for buying stock or making other investments. First, they insist stock should be traded at less than half the highest price it has reached in the past year. This provides the opportunity for significant returns once the stock makes its turnaround.
Second, the pair looks for signs that the stock has support from knowledgeable insiders. Heavy purchases of stock by company managers or high-profile outsiders, for instance, is an encouraging sign that a stock has hit rock bottom and is ready for a rebound. They also look for companies of significant size _ a market value in excess of $150-million _ and shares that are trading above $5 each.
And investors must be willing to make a commitment for the long haul. The authors suggest that it can take as long as three years before investors can cash in on their strategy.
"Contrarians start with the premise that they will make their move early, and that the masses will eventually see what they saw," the authors write. "That takes time."
The advice should also be taken with a grain of salt. In today's fast-rising market, only a handful of stocks even meet the authors' criteria. Second, individual investors may be less astute than a market professional in differentiating between a stock that has reached rock bottom and one that is in the midst of an ongoing free fall.
That said, the book does provide investors a valuable reality check in an age when the stock market continues to defy gravity.
What goes up surely must come down. For contrarians such as Gallea and Patalon, the old adage translates into a simple recipe for making money.
_ Teresa McUsic reviews business books for the Fort Worth (Texas) Star-Telegram.