If I were to ask several doctors whether skipping a third round of Chunky Monkey ice cream would help me lose weight, I suspect they would all say yes. My success wouldn’t be affected if others heard the same opinion.
If mechanics all say a front-end alignment will keep my car from pulling left or right, there’s no reason to doubt it. In fact, I’ll feel more confident knowing that the experts agree.
When it comes to deciding what investments to buy or sell, though, popular opinion will cost us money. How so?
The return we get depends on the price we pay. When the consensus opinion about a stock is positive, that is already reflected in a high price. The returns we can expect won’t be great.
Where there’s less of a consensus about a stock, the price will be low. That leaves room for a higher return.
Everyone agrees that it’s great to buy low and sell high. To accomplish that requires being able to tell a high price from a low one.
Oddly, when the consensus view is positive on a stock, it may be time to sell. When popular opinion is negative, it may be time to buy.
Barry Dunaway, CFA®
Executive Vice President & Director of Research
America First Investment Advisors, LLC
This post expresses the views of the author as of the date of publication. America First Investment Advisors has no obligation to update the information in it. Be aware that past performance is no indication of future performance, and that wherever there is the potential for profit there is also the possibility of loss.