Human beings are prone to a herd mentality where we have a natural desire to follow the crowds. From fashion and dietary trends down to life-changing decisions, this mentality is evident in all aspects of human life because it gives us an internal sense of acceptance and security – at least temporarily.
The same holds true in the financial world where investors habitually watch what the broader investment community is doing – a practice which can seriously hinder our wealth progression in the long run. This can involve buying the stocks that the market is favouring whilst selling their underperformers in a state of panic.
Panic Selling
As a perfect example, Woolworths Limited (ASX: WOW) was sold off heavily by the market on Friday after it reported its first-half earnings results. The stock fell nearly 10% on the day – which is enormous for a $42 billion company – and that selloff was backed up by another 4.6% selloff on Monday. If you ask me, the people who bought the stock during that secondary day of weakness are the big winners – they bought themselves a stake in one of Australia's best companies at a reasonable price.
Although the report was far from impressive, there were definitely some positive signs for the long term. While sales from its Masters Home Improvement chain improved considerably over the period, the company also said that short-term earnings will take the backseat in favour of an investment to drive long-term growth. Long-term investors should recognise this as the perfect opportunity to buy.
Panic Buying
At the opposite end of the spectrum however, other investors are piling into stocks which are widely considered to be overpriced, simply because that's what others in the market seem to be doing. Take Commonwealth Bank of Australia (ASX: CBA) as a perfect example. It is one of the most expensive bank stocks in the world, and is heavily exposed to Australia's inflated property market, yet investors continue to bid the stock price higher – largely because of its generous dividend yield.
Telstra Corporation Ltd (ASX: TLS) is another great example. While there's no questioning the business' quality, the shares are by no means cheap yet investors continue to pile their funds into the stock.
4 more stocks for the contrarian investor
Investors who took a contrarian approach to investing would recognise this wide-scale blunder and put their money behind some of the market's other high-yield dividend stocks instead, such as Coca-Cola Amatil Ltd (ASX: CCL) or JB Hi-Fi Limited (ASX: JBH). While they mightn't be the broader market's top priority right now, they could certainly reap rewards in the long-run.
For market-beating returns, investors could also look towards growth stocks such as Greencross Limited (ASX: GXL) and G8 Education Ltd (ASX: GEM), both of which have been sold down heavily in recent months. While the market has clearly cooled its view on their prospects, contrarian investors could recognise this as the perfect opportunity to buy two high-quality businesses at discounted prices.
Here's how YOU can beat the market
Beating the market's returns should be the goal of every investor, yet very few ever manage to achieve it consistently. Rather than following the crowd into often irrational trades, investors should constantly remain on the lookout for high-quality businesses trading at reasonable prices and look to hold them for the long-term, ignoring what the market may or may not be doing today or tomorrow.
