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9:21 pm - Wednesday November 13, 2019

The Trend Isn’t Always Your Friend – Improbable Scenarios Present Rare Investment Opportunities

| Investing | Rating: 4.5
by Numan

The probable probably won’t happen

It is a common belief among investors and financial planners that patient long-term, diversified investments will eventually yield a nice solid return on investment. A common advice is to avoid trying to time the market and just join in and wait the long-haul. I am among the supporters of this strategy although I’m still finding my own balance in the stock market as holding on for the long-term isn’t as easy as it may sound.

With all do respect to long-term investments many investors find it very difficult to wait out the long years necessary to yield truly fantastic returns. These individuals hope to achieve double-digit returns in a few months and truly capitalizing on their investments.

This kind of ambition obviously requires taking a tremendous risk and might definitely constitute a gamble but this time I’m not here to judge. Today I wish to offer a more philosophical approach with an interesting twist to high risk-return investments.

Looking back to the past couple of years we can definitely say the unexpected happened while the expected most certainly didn’t. One of my favorite quotes is that the probable probably won’t happen. I wish I could credit whoever said it first but I can’t remember.

Sky rocketing oil and commodity prices, the credit crunch and the sub-prime crisis, housing price slumps, the emerging markets boom all had a tremendous effect on the markets and neither of these was foreseen, to its full affect, in advance.

Naturally, all these “surprises” generated phantasmal returns to those who got it right. Analysts, Institutional investors (pension funds, insurance companies, mutual funds and more), investment banks and most investors invest with the trend. “The trend is your friend” has certainly proved itself more than once and it is most definitely right for long-term investors but in the short terms having the guts to go against the trend can really cash-in.

If you truly understand the perfect market hypothesis you surely understand all the known data is already represented in stock prices. The most common and probable scenario is already factored in stock prices and you, as an investor, can not really out-perform the market with available market information.

Betting on the less likely scenario is much similar to betting against the odds. However, unlike pure gambling some analysis could prove useful in such a case. Taking an in-depth look at the core assumptions behind the probable scenario can help us, as investors, to constantly question their truthfulness and reasonability. Questioning the generally accepted scenario and constantly stressing it and the assumption at its core can lead to real insights into the markets.

I’m sure employing this investment tactic requires skill, expertise, practice and experience. I’m pretty sure many high-rolling investors and investment banks employ teams to do just that. Simply betting on the edges can also work but it will fail more often that it might succeed.

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