Do you Want to Make Money? Invest like George Costanza!

In a classic Seinfeld episode, the perpetual loser George Costanza decides to make a dramatic change to his life. Since his decision-making process has proven to be highly questionable in the past (e.g., pushing women and children out of the way to escape when a fire breaks out at a party), George decides to do the opposite of what he would normally do. The amazing thing is that this works. When he meets a beautiful woman he tries this strategy. Instead of fabricating a story and making believe he is a marine biologist or the infamous exporter/importer Art Van Delay, he says, “My name is George. I am unemployed and I live with my parents.” To his surprise, she agrees to go out on a date with him.

What does this have to do with investing? The answer is plenty. The markets are very counterintuitive and often illogical to an outsider looking in. Often, the use of logic will lead to big losses. Markets are very forward-thinking and discount what has already happened. Therefore what a normal person would consider news, a savvy investor will ignore and react in a seemingly misguided fashion. As Barry Ritholz wisely stated, ” News is old. It is misnamed and not forward-looking.” Black is often white, and white is often black in this crazy world. Those who do not understand this are walking down a dangerous path.

We can see this counterintuitive reaction of the markets constantly repeated. For example on January 17, 1991 a massive aerial bombardment of Saddam Hussein’s forces commenced. Preceding the launch, the markets had been floundering. The uncertainty of war was weighing greatly on investors’ psyches. When the bombs started to fall, many Americans believed it would lead to a full-fledged stock market crash. A funny thing happened on the way to the forum: the markets rallied! Three months later, the market was up 10%. This would be equivalent to a 40% gain for the year. Why would people buy stocks when such carnage was about to commence? The answer is that the breaking news was already old. Investors projected their worst fears would not be realized, all the bad news was discounted. This has happened time and time again.

In August of 2005, Hurricane Katrina made landfall. This unprecedented storm killed 1,836 people and caused over $100 billion in damages. There were reports of anarchy in New Orleans; rape, murder, and even cannibalism. Prisons were opened and inmates were dangerously too close to the public. Martial law was declared and orders were given to shoot anyone who violated curfew. A normal rational person would assume the stock market would get pummeled. What happened? Five days after the storm was over the market was 2.15% higher! Say, what? News is old. The market looked forward. The buzz was now the government and how private industry would have to rebuild massive amounts of infrastructure. This in turn would create jobs, and all of this spending could actually have a possible positive effect for the economy and private business as a whole. Investing is not math, and often the numbers do not add up to what you think they should be.

There are countless other examples of this counterintuitive behavior and disregard of current “news.” In 1998, Gerald Pence the CEO of Cott Corp. passed away. While terrible news for him and his unfortunate family, investors had other ideas. One would assume when a leader dies it would cause a negative reaction by investors leading to selling of the position. To paraphrase the character, John Bender, from “The Breakfast Club”, while this may be “demented and sad” The stock rallied 8.1%!! Investors felt needed reform would now come with a new CEO which would pave the way for a higher stock price. You really cannot make this stuff up.

Another example of this phenomenon is when companies announce strong earnings results and the stock subsequently gets trashed. Why would anyone sell a stock after it just announced it made a boatload of money? There are many reasons for this. The earnings may have been good but not as high as the anticipated “whisper” number. The good news was not news at all because it was expected and factored into the current price. This will only leave room for disappointment. Sometimes, the stock will go down after record earnings because their future outlook will not be as bright. What have you done for me lately? The market always looks ahead and the so called “news” is ignored. What investors see is an uncertain future. A rational person would believe that it would be a sound idea to buy a stock after it just announced it made a bunch of money. Caveat Emptor.

Finally, markets and the economy are two entirely different things. Markets will rally in recessions and will begin to decline during the peak of expansions. Economic news is often received by the market in ways most cannot logically comprehend. Often a very bad economic statistic will be announced and the market will rally! What gives? High unemployment, low business and consumer spending are obviously not good news for anyone with the exception of bankruptcy lawyers. The market will often rise on the back of this negativity because the future is anticipated in an entirely different manner. This bad news will often be accompanied by the government riding to the rescue in the form of lower interest rates (monetary policy) or stimulative government spending or tax cuts (fiscal policy). The opposite may occur when good news is announced: the anticipation of the punch bowl being taken away and possible restrictive policies on the horizon can lead to a decline. Bad news is good news and good news is bad news.

To sum things up, it would be helpful to keep in mind the events of 1781 when thinking about investing. The Mighty British Army was surrendering to the French and a group of rag-tag colonists, led by a General who was most known for losing battles. As the British officers handed over their swords and prepared to depart for England, the military band played a tune called “The World Turned Upside Down.” An investor could do far worse than remember this song when thinking about investing hard earned capital. Just ask George Costanza.