Do you remember when “contrarian investor” was the thing everyone wanted to be? They were toasted by Wall Street until the continuous and expansive bull market of the 1990s toasted them in a different way.

Yet, contrarians survived. Maybe under the radar, but they still survived. That's because they knew the secret to making money from investment fads.

We're in an era rife with investment fads (see “Exclusive Interview: Robert R. Johnson Says Cryptocurrency 'Laughable,' Won't End Well,” FiduciaryNews.com, June 25, 2019). Sometimes you see them, sometimes you don't. They look just like investment trends until they don't. People make money with them until they don't.

Here's how a contrarian makes money with them: They don't. They make money the old-fashioned way. (What's more contrarian to “fad” than “old-fashioned”?)

This is not to say contrarians don't make money as a result of fads.

Here's why: This may oversimplify things but think of investing as a zero-sum game. It's like two glasses of water, both half-filled, standing next to each other and connected by a pump. The water level is a metaphor for the price.

The water level is equal until you start pumping water from on glass to another. That glass that's filling up is the fad. The glass being drained is the “old-fashioned” way.

Those who bought into the fad early (when the water level was equal) certainly made a killing as the water level rose in their glass. In fact, the contrarians who insisted in staying with, much less buying into, the draining glass look downright crazy. Little do the fad followers suspect, but the contrarian's strategy may be so crazy it just might work.

As the madding crowd stampedes towards the fad filling the glass, the cost of buying a piece of the draining glass goes lower and lower. Sometimes, to those without a scrutinizing eye, it appears the contrarians are stubborn. They insist on trying to catch a falling knife.

All fads finally fizzle. The water in that glass has nowhere to go but back where it came from. And usually in a rush. The contrarians everyone laughed at now hold all the real estate in the formerly draining (now filling) glass. Those wanting to abandon the fad have no other choice than to bid up the price for the rapidly filling contrarian glass. Soon, nearly all of the fad glass is drained into its once scorned companion.

Now, here's the key. Recall how each glass started even. The earliest the faddists could have bought into the fad glass was at the half-filled point. If they sold just as the glass topped off, they would have doubled their investment. Of course, those who couldn't sell fast enough until the glass was entirely drained lost everything.

The contrarian, however, paid no more than when the glass was half-filled, and could have paid significantly less as the water drained to the other glass. In the best case, as the contrarian glass was nearly completely drained, the cost would be merely pennies.

Then, as the fad faded, the contrarian started making money. A little at first, but increasingly more. As the contrarian glass filled to the top (meaning all the water had been drained from the fad glass), those who bought contrarian at the highest (when the initial water levels between the two glasses were even) doubled their value. But all other contrarians fared far better.

And far better than those captivated by the fad.

A contrarian doesn't make money in the middle of the fad – in the middle of the fight, if you will. A contrarian makes money only after the fad becomes a carnage and all the fad believers flock back to the old-fashioned way the contrarian never lost sight of.

So, what would you rather lift a glass to? Bragging about your investments at some cocktail party or retiring in comfort?

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