One of My Favorite Stock-Buying Strategies Just Won the Nobel Prize

This is big, and I'll show you why in a minute...

University of Chicago heavyweight thinker Professor Richard H. Thaler just won the Nobel Prize for Economics.

I read all the stories about Thaler's win with real interest.

You see, I'm a big Thaler fan for one very good reason: When it comes to the economy and the stock market - and the role investor emotion plays - nobody "gets it" like Thaler.

And right now, Thaler says he's "nervous" about stocks.

"We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping," Thaler told Bloomberg Markets. "I admit to not understanding it."

Take it from me: This is a guy you need to listen to. I have - for years.

In fact, in our 1998 book, "Contrarian Investing: How to Buy and Sell When Others Won't and Make Money Doing It," my money manager co-author Anthony M. Gallea and I cited Thaler's work as a foundation for our out-of-favor stocks strategy.

And after years of having his research and theories on behavioral finance ballyhooed by the "smart money," Thaler's views are now taken as investing gospel.

However, elevating Thaler's cautionary comments to fire-drill status - and cashing out of stocks completely - may not be the answer, either.

After all, members of the gloom-and-doom crowd have been predicting disaster for several years now - and have lost out on trillions in wealth as U.S. stocks have set one record after another.

Don't panic.

Indeed, take heart - there's a middle ground. And it's a good, profitable place to be.

Unlike most "compromise" stances, our "middle-ground strategy" is a powerful one: We'll keep grabbing the gains as long as the bull market rages. And when the inevitable decline comes, we'll cash in while the rest of the crowd panics.

So today, I want to show you more about this strategy we use constantly, pioneered by Professor - and now Nobel Laureate - Thaler.

Drilling down into Prof. Thaler's savvy take on the stock market's inner workings is the perfect place to start...

The Death of "Homo Economicus"

Thaler, 72, was a founder of a field of thinking known as "behavioral economics and finance." His basic premise: Human emotion has a much bigger impact on decision-making than cold, hard facts.

For a long time after Thaler first espoused this theory, it was viewed as financial blasphemy by the entrenched academic elite. Those folks hated this viewpoint because it wholly contradicted the traditional belief in the existence of a "rational man."

Report: This new military aviation boom just got a $112 billion shot in the arm

Indeed, in its story detailing the Nobel announcement, The Atlantic said Thaler earned the prize in economics by "killing Homo economicus."

So emotion - not facts or logic - drives some of our most critical investment decisions.

Investors aren't rational, they're irrational. Predictably irrational.

And that's a bit of insight you can profit from.

Heavily, and often.

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It was this very bit of insight that formed the basis of the book Tony and I wrote. And it serves as the foundation for my "Contrarian" view of the market - which, at its simplest, is this...

Investors get emotional. And that means they get irrational.

They overrun stocks to the upside - with an exuberance that drives up share prices way above any meaningful value. And they overrun stocks to the downside - beating shares down well below their real worth.

It's only ahead of inflection points that you want to be ahead of "the crowd."

There are other variations, too - but these are the two most basic (and most common) variations you'll see.

And once you understand this, you can cash in.

You see, there's a massive misconception about the Contrarian approach: That it means your point of view is always at odds with - contrary to - the overall market.

That's not accurate.

stock-buying strategy

Even as a Contrarian, most times you want to be in sync with emotion, with sentiment. It's only ahead of "inflection points" - changes in direction - that you want to be ahead of "the crowd."

Take our two simple examples to see what I mean.

When stocks are beaten down to bargain-basement levels, you buy. You want to recognize that bargain status before everyone else.

But of course, once you have your stake, you want everyone else to see what you saw. You want them to "agree" with your viewpoint. You want them to buy in.

By agreeing with you - and buying "your" stock - all the other investors in the market bring in the liquidity needed to drive that stock higher.

In short, the other investors do all the "heavy lifting" for you.

Let me give you an example of how we did precisely that. It was a move that made my Private Briefing readers who followed along a ton of money...

Boeing's "Dreamliner Nightmare" Was a Huge Opportunity

This was back in January 2013, during the Boeing Co.'s (NYSE: BA) 787 "Dreamliner" battery scare.

You probably remember the lithium ion (Li-ion) batteries aboard two Japanese Dreamliners - one All Nippon Airways, the other Japan Airlines - caught fire. Five aircraft in total were eventually involved.

The critical, unresolved safety issue set off a media frenzy - and a classic investor panic.

I knew from my years in news that this story would take on a life of its own. More importantly, I knew it would beat Boeing's shares way, way down below any representation of fair value.

This "Other" Aviation Boom Could Be Hugely Profitable, Too...

Boeing shares could possibly go higher for the next 20 years thanks to the long-term demand surge for its jets, particularly from China.

But there's another aviation niche that Wall Street's just not taking seriously right now, even though Congress just gave the sector a $700 billion shot in the arm, and the military wants this same niche technology yesterday.

Bill's all over it, though; he couldn't be more excited about the potential that could be even bigger than Boeing.

Click here for Bill's research presentation on this intriguing "next frontier" opportunity...

And once the story "went away," I knew the stock (which I already liked and had recommended to you) would soar.

Sure enough, the story (and the problem) did go away. And the stock did soar.

Boeing closed the day we said this at $75.04. It's now at $262 - a jump of 248%. Add in all the dividends, and the gain exceeds 260%.

The bottom line is, as Boeing became embroiled in the battery story, the crowd got emotional - and completely lost sight of the huge demand for jetliners that was inevitable over the subsequent 20 years.

The battery "debacle" didn't alter that story one iota; it did nothing whatsoever to damage the investing case for owning Boeing well in advance of the inevitable demand surge.

Essentially, all that "temporary insanity" did was to give us a great stock - on sale.

With overvalued stocks, it's the same process - just in reverse.

You short that overvalued security (outright, by using "inverse" securities or even "put" options), and you profit when the rest of the crowd removes liquidity - by dumping their shares and causing the stock to plunge.

There are variations on the Contrarian strategy, of course. One of my favorites, which I use here frequently, is to find stocks that are cheap because their true value hasn't been recognized or is underestimated.

These haven't been "beaten down." They just haven't gone up - yet.

This Was About More - Much More - Than Video Games

That was the strategy we followed with chipmaker Nvidia Corp. (Nasdaq: NVDA), a stock we recommended in June 2013 - and re-recommended many times since.

At the time, the graphics chipmaker was known to most as a "gaming play."

But we knew better. We knew the stock wasn't being valued fully for its work with the cloud.

And then, as the driverless car revolution began, we knew its chips would work with those innovations, as well. It also evolved into a quintessential "artificial intelligence" (AI) play and also a virtual reality (VR) play.

In short, the other investors do all the "heavy lifting" for you.

All along the way, investor emotions ("It's gone up too much" or "It's overvalued") kept them from understanding the huge potential that was clearly there.

The stock is up more than 1,200%.

(Nvidia has even surged 11% since mid-September, when we recommended it again. And it just announced that it's the key player in a new driverless vehicle test that's to take place in Germany next year.)

Microchip

So, now that we know there are other ways to invest - other mindsets that allow us to bet against, and profit from, "the crowd" - let's look again at just what it is that Thaler is worried about.

Because I know we can turn that to our advantage.

Thaler's Big Concern: Volatility Has Totally Dried Up

The last really extended rough spot in the U.S. stock market was the 2015-2016 stock market sell-off, ignited in August 2015 by global financial worries. It was hallmarked by a two-day drop of 888 points on the Dow Jones Industrial Average in August of that year, including a 531-point (3.1%) decline on Aug. 21, 2015.

That triggered a period of whipsawing volatility that reached into 2016.

In a market that moves by the minute, that might as well be centuries ago. Or, as my good friend and Money Morning Technical Trading Strategist D.R. Barton, Jr., told me: "Bill, the last real correction is way back in the rearview mirror."

D.R., author of the new best-seller The 10-Minute Millionaire, said that we haven't had a 5% pullback since June 28, 2016.

And we haven't had any 10% corrections since early 2016 - the fiscal cliff fallout.

Since then - and especially after the November 2016 election - U.S. stocks have been on a tear. And volatility has disappeared.

And that has Thaler worried.

Really worried.

He told Bloomberg that the low-volatility stock market is "napping" - despite the uncertainty of North Korea, an emerging Chinese military threat, and political vitriol that's splitting the country to a degree unseen in 40 years.

The way he sees it, that escalates the risk of "getting spooked" - and causing a painful, knee-jerk sell-off.

"I don't know about you, but I'm nervous, and it seems like when investors are nervous, they're prone to being spooked," Thaler said in his interview. "Nothing seems to spook the market," and if the gains are based on tax-reform expectations, "surely investors should have lost confidence that that was going to happen."

There are many factors at play here. And the truth is that experts have been calling for a downturn for a long, long time.

Also, this market isn't just an emotion-driven one. It's also been driven by still-cheap money - thanks to super low rates, the lack of attractive investment alternatives, and a lack of price inflation.

So it's not a clear-cut call to say when an inflection point might come.

Then again, it doesn't necessarily matter if you're ready for it now. You can be ready, and you can profit greatly when we do reach the inflection point.

To do that, you need to be use the "accumulate" strategy.

Now, this isn't a trading strategy. And it's not just "buy and hold."

It's kind of a hybrid. And it's one that will maximize your windfalls in the long run.

It's very simple to execute.

  • Identify the companies with the best long-term prospects - the stocks you want to own for the long run.
  • Create a "shopping list."
  • Establish positions in the stocks you want to own.
  • Then wait for pullbacks.
  • And with every pullback, add to your holdings.

Just a few bucks here and a few bucks there will turn into meaningful wealth.

You'll be turning any and all downturns - or even all-out bear markets - to your advantage.

We mentioned two "accumulate" stocks - Boeing and Nvidia - in this report.

Right now, I'm assembling a "shopping list" of other great stocks for my Private Briefing readers to jump on and accumulate.

Follow Bill on Facebook and Twitter.

About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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