"I Gave Up Being A Contrarian When...

... I discovered that everyone else was one, too."

Martin Fridson wrote the following in his 1993 book, Investment Illusions:

"It's gratifying to the ego to believe that you can remain rational when the crowd is euphoric or despondent. Contrarians who peddle investment advice count on this psychological motivation. Financially speaking, though, humility may be the better prescription. There's no sure-fire system of making sure to zig when everyone else zags."

I'm guilty of gratifying my ego in this way, thinking of myself as being above the crowd. When I was a day trader, my main method was to short stocks that had been on the fly, which was a dangerous thing to do. I guess I liked playing with fire and just got lucky that I never got badly burned. It helped that I always had a tight stop and was in front of the screen all day. Now I understand myself a little better and try to avoid playing that particular game of "chicken."

Nevertheless, when I look at the net inflows into mutual funds, I can't help but think "sell bonds, buy stocks."

If you look at all the times in the past that bond inflows were negative (i.e. folks were fleeing bonds), in 1987, 1994, and late 1999 / early 2000, those were precisely the times one should have been buying bonds, not selling them. In the chart below I've inverted the Yield on the Ten-Year Treasury Bond to simulate bond prices, and marked the approximate areas of net outflows from bond funds with the blue rectangles.

What is it about people that makes them want to buy (stocks, bonds, gold, stamps, real estate, etc.) only as prices hit new highs?

I noted in a recent entry that Bill Gross's gleeful rant about "Dow 5000" may have marked the top for the bond market. I also read that his bond fund just surpassed Vanguard's S&P 500 Index fund in terms of total assets under management, which was another red flag.

I think that one look at the currently enormous inflows into bond funds should make even the humblest investor want to "zig" as the crowd "zags."

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