Weekend Investor
May 29, 2009, 5:01 p.m. EST
Oracle of the Oval Office

What individual investors can learn from President Obama's stock-market call


By Alistair Barr, MarketWatch


SAN FRANCISCO (MarketWatch) -- In the thick of a stock-market panic in early March, President Barack Obama suggested that equities looked attractive for long-term investors.
Good call. An investor who followed the advice the president gave on March 3 and plowed money into U.S. stocks that day would be sitting pretty now. After slumping for a few more days, the Standard & Poor's 500 Index (SPX 919.14, +12.31, +1.36%) began a ferocious rebound.

Reuters


The benchmark index is up 32% since March 3. That beats more than 1,000 actively managed diversified U.S. stock mutual funds during the same period, according to investment researcher Morningstar Inc.
Contrarian courage

Rather than just being great (or lucky) timing, Obama's stance highlights several important lessons for individual investors.

One major lesson is that it pays to think and act differently from most other investors in the stock market -- so-called contrarian investing.
"This is one of the more visible examples of how going against the crowd and taking a contrary position works out spectacularly well," investment strategist Ed Yardeni said.

This is particularly important for individual investors, who may not have the time, connections or resources to latch on to important news or trends as early as professionals do.

By the time an idea has spread and been accepted by the market, share prices often already reflect that. Taking the opposite view at such moments can be more productive than following the herd.

In the weeks leading up to Obama's forecast, investors were concerned about the threat of deflation.

They also worried that some of the nation's largest banks, such as Citigroup (C 3.72, +0.05, +1.36%) and Bank of America Corp. (BAC 11.27, -0.03, -0.27%) might be nationalized, wiping out shareholders of those lenders.

Buying stocks in the midst of such fear takes courage -- another important trait of successful investors.

"When it's time to buy the market, you won't want to," said Eric Bjorgen, portfolio manager at Leuthold Weeden Capital Management.
Berkshire Hathaway Inc. (BRK .A 91,600, +350.00, +0.38%) brk .b (BRK .B 2,972, +71.90, +2.48%) Chairman Warren Buffett, one of the most successful long-term investors, puts it another way: "Be fearful when others are greedy, and be greedy when others are fearful."

Buffett, known as the Oracle of Omaha, was one of Obama's economic advisers during his presidential campaign last year.


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Buying when prices are down -- a lot

Ted Aronson, founder of Aronson+Johnson+Ortiz, an investment adviser with $16.5 billion under management, reckons that individual investors can learn an even simpler lesson from Obama's coaching.

"I am tempted to cite Obama's market-timing skills (which he may have), but I suspect that's not what was illustrated by the good call," Aronson said in an email. "It was more a logical, or shall I say highly probable, call based on price alone."

Stock valuations can be gauged by dividing share prices by earnings, book value or myriad other measures. But the most important part of any of these ratios is price, Aronson explained.

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