Maximum Pessimism investment strategy

Maximum Pessimism is in short, as Warren Buffett has put it: Be Greedy when everyone else is Fearful and be Fearful when everyone is Greedy. Less eloquently expressed, it is simply “buy low, sell high”.

“Invest at the point of maximum pessimism, in companies of high quality, where you detect future earning power is patiently being built but is not yet recognized by the market”

– Sir John Templeton. Legendary investor and mutual fund manager who founded the Templeton Growth Fund

Maximum Pessimism is an example of “timing the market” strategy. Sir John Templeton of the 20th century formulised it. His value contrarian philosophy towards investment largely focused on finding excellent companies neglected by the market and purchasable at a discount. He also pioneered foreign company investing, something which was largely unheard of nor practised by investors during his time. We know it now as the spreading of geographical market risks.

Many investors in the market buy stocks with the most attractive valuations. Investors are also subconsciously affected by crowd psychology (aka groupthink) and their decision-making largely made on behavioral observation of others. They would rather receive their information from others than commit themselves to doing their own homework.

“People are always asking me where is the outlook good, but that’s the wrong question,” he responds. “The right question is: Where is the outlook the most miserable?” Templeton calls this approach to investing “the principle of maximum pessimism.” Others might call it contrarianism. He explains it this way:

“In almost every activity of normal life people try to go where the outlook is best. You look for a job in an industry with a good future, or build a factory where the prospects are best. But my contention is if you’re selecting publicly traded investments, you have to do the opposite. You’re trying to buy a share at the lowest possible price in relation to what that corporation is worth. And there’s only one reason a share goes to a bargain price: Because other people are selling. There is no other reason.

“To get a bargain price, you’ve got to look for where the public is most frightened and pessimistic.”

The concept of Maximum Pessimism is easy to understand yet hard to execute at the same time. Typically, an investor who practises this strategy keeps a large but readily available war chest (reserve funds) to tap on market opportunities like these when they present themselves. The downsides are, how do you know when will a real market down occurs and not a temporary drawback? When is the maximum market bottom? Are you able to control your emotions in going against the tide when it happens?

While the potential risk-reward ratio is higher, we recognise that it may not be for everyone. Are you a avid risk taker?