Wednesday, August 16, 2017

Bitcoin, gold, stocks, real estate... when the mainstream promotes it, should you really own it?

As we have noted before here at The Daily Economist, many of the greatest wealth achievers in history have accumulated their money by betting against the mainstream.

 “The time to buy is when there's blood in the streets.”


Following the 2008 financial crisis, no one would touch bank stocks with a 10 foot pole.  However Warren Buffett believed he saw value and the expectation that Goldman Sachs would eventually be bailed out and made billions of dollars by investing in the business despite the fact that the stock price even fell an additional 30% before it recovered to a nearly 100% gain by 2010.

Then of course there was the final week of 2014, where every hour on the hour CNBC was pushing IBM stock to viewers by telling them 'this would be the year'.

So the question that has to be asked is, if the mainstream and/or Wall Street is going full bore into an asset or asset class, should you ride the coattails and own it, or instead look for the value contrarian play that the market is vilifying?

For the first seven years of its existence, Bitcoin and other cryptocurrencies were either ignored, laughed at, or crucified by Wall Street and mainstream analysts.  But suddenly in 2017 everyone seems to be on the crypto bandwagon, with brokers, hedge funds, and analysts all singing the praises of it being the next 'unicorn' play.

And this has proven to be profitable as Bitcoin alone is up almost 500% since the beginning of the year, and cryptos like Ethereum are up 3000%.  However most of Wall Street did not turn its attention to the cryptocurrencies until a great deal of the gains had already been accomplished this year.

And with this being said, the question one must ask is, should you be an owner of these hyperbolic cryptos now that Wall Street is recommending them, or a seller?

Then of course there is the stock market, which has been propped up with trillions of dollars from central bank intervention and company share buybacks to skyrocket the Dow, S&P 500, and Nasdaq to all-time highs.  Yet this was achieved with little volatility and few short positions.

Thus should you be an owner of stocks at nearly record P/E ratios and no fundamental justification for these prices, or is it time to collect your profits before this bubble bursts?

Or perhaps one could get into real estate, which has seen prices reach if not surpass their average all-time highs achieved at the height of the housing bubble back in 2006.

Yet there is really only a few contrarian plays currently available in the markets, and ones where the fundamentals are extraordinarily good, but sentiment is at some of the worst in history.  And those assets are gold, silver, oil, mining stocks, and a few other commodities.

Ironically though, sentiment for these are very high over in Eurasia and the Far East, while absolutely tepid in the U.S. and Europe.  And one must determine if their depressed prices make for a tremendous value play, and one where the ceiling could be unlimited once the markets turn their eyes away from the popular over-valued assets and back into these long-time safe havens.

Most investors have been around long enough to have gone through at least two bubble markets, both of which were pushed and pumped by the mainstream all the way until they crashed, and where very few came out unscathed because they were caught up in the frenzy.  And it is those traders that can lay off the emotional swings and propaganda and instead buy value when it is low that will hold the best performing assets over the long term, and not lose their shirts riding the popular wave until it is too late to profit.

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