Ponder, for a moment, the following statistics. Over the last 15 years, the average American equity fund has provided a total cumulative return of over 500%. Yet the average American mutual fund investor enjoyed a total cumulative return over the same 15 years of only about 180%.

Why this enormous difference between mutual fund and mutual fund investor performance? One reason seems to stand out.

Investors are notoriously poor at controlling emotional investment behaviour. Many consistently buy into investments that have already enjoyed stellar performance, while staying away from those that are currently on sale. This investment behaviour runs contrary to buying attitudes for all other products and services, which are generally bought on sale.

When it comes to investing, we tend to bounce between unbridled optimism and unwarranted pessimism. We have charted typical emotional investment behaviour for you below.

Several investment trend surveys have indicated that investors, in general, were pouring very little money into investments this fall, compared to the most recent stock market peak of the spring of 2000. One tenth as much. Why?

To profit from buying in corrected stock markets, one must conquer emotional road blocks (translation: “fear”) in order to continue to make rational decisions.

It could be argued that the greater the correction, the greater the opportunity for long-term profit. Most investors buy what has just gone up, viewing it as indicative of future performance, rather than buying what has recently declined to more attractive valuations.

All that is needed is a simple 180-degree reversal in strategy to profit from more appropriate investing. The chart below indicates what this could mean to you in long-term performance.

Let’s say that Fred were to invest $10,000 of new money each year, and had done so consistently for the last 20 years (20 x $10,000 is $200,000). Each year, Fred buys into the previous year’s top performing market index. His outcome as of December 31, 1999 would have been $857,617. Let’s compare that to Wilma, who followed neither Fred nor the herd. Wilma invested $10,000 each year into the previous year’s worst performing index. Again, $200,000 was invested over 20 years. Wilma’s result from buying on sale: $957,263 — a gain of almost $100,000, or 11.66%, over Fred’s approach.

Clearly, this works most favourably by investing while markets, as a whole, are down: the so-called macro-market tendency at this time. Nevertheless, it also works when one particular part of the market is down.

Let’s consider Pebbles’ approach. Pebbles, instead of following the examples set by her mother and father, Wilma and Fred, starts off by allocating money evenly across a number of market segments. Thereafter, as some markets rise and others fall, she continues to even out or reallocate her portfolio to have an equal portion in each pot. She invests the same $10,000 each year and the same total of $200,000 over 20 years, as have her parents. Pebbles ends up with $1,230,984, a whopping gain of 43% over her father. We have charted this above.

Contrarian investing offers investors the opportunity to significantly improve their long-term results and more closely reflect market performance. By buying at more appropriate valuations, buying diversified investments, controlling our emotional investment behaviour, and holding our investments in tax-efficient vehicles for the very long term, we usually end up winners.