Let’s face it. You were told that stocks always go up in the long run. It’s true, of course, that over the course of the last 150 years, stocks have always gone up. Of course, I haven’t yet met a person that has lived 150 years. As of November 3rd, the S&P 500 index, the most broadly representative index of large cap companies in the United States, was down 16.94% from 10 years previous. If dividends are factored in, the total return was just under 1%. I know quite a few people today who would actually be happy with break even on their mutual fund investments. Of course, it is impossible for the majority of institutional investors to beat the market because they are the market. Better than 70% of all trading is made up of pension funds, mutual funds, insurance companies, hedge funds and the like. They make decisions like sheep – following the animal in front of them with no real idea who or what is actually leading them.

Analysts and brokers – Institutional investors are led by the very animals that are bound by their very nature towards mutual destruction. But how is this possible? Even the mighty financial giant (less gargantuan by the day, mind you) Alan Greenspan marveled when testifying in front of Congress. He believed that the companies and individuals would always act in their best long-term interests. The problem, of course, is that companies and institutions are made up of individuals who all act in their own self-interest, very often with a short-term objective.

How many analysts were recommending the wholesale selling of bank stocks two years ago? How many brokers recommended moving to cash when the index was hovering around 1,550 a year previously? And I wonder what the analyst (I’ll leave him anonymous, but it’s a big firm) had in mind in the spring of 2007 when he upgraded Citigroup from a hold to a buy? And now that the company is on life support he’s suggesting it has become a sell?

More fodder for the serious contrarian. If you had sold tech stocks in 1999 you would have been laughed at. And you would have made serious money. If you had bought oil in 1998, when the Economist magazine ran a cover story stating that the world was awash in oil and the price would plummet to $5.00/barrel, you would have made a fortune. The lesson is that the experts, en masse, are always wrong. They have a bad habit of predicting the immediate future according to the experience of the recent past.

The best profits are made investing when very few others are investing. As well, the least amount of capital risk is when the news is all bad. It makes it tough because it is not self-reinforcing. You’ll buy something just in time for some more bad news to come out. It’s totally counterintuitive – but it works.

I remember suggesting to a colleague a couple of years ago that we should purchase farmland – just buy as much wholesale farmland as we could. He replied that his grandparents had held farmland for 30 years, and each year the value decreased along with the rent that they could fetch from it. In fact, they were ready to dump it. You can see a trend – it’s straight down. And it’s been reinforced for 30 years. Subsequently agricultural commodities and land had huge gains, and I expect that they will continue for at least the next 10 years.

I’ve bought buildings from people that basically sold them to me for what they paid for them 25 years previous only to see them double in value in a year and a half. One complained to me that he waited 15 years for his property to double in value before he sold it to me, and then it doubled again in one year.

Getting a one-year double on an apartment building is pretty lucky. Or is it? I can’t predict that our purchases will increase that quickly in value, there will probably be a longer waiting period, but the wonderful thing is that on the properties we purchase, we are paid to wait. We can still fix a pretty low cost of capital on a long-term basis. And we always position our investments so that the worst thing that can happen is that we collect rent and make positive cash flow until someone makes us an unreasonably high offer on a building.

I’ve learned over the years that it’s usually the voice crying out in the wilderness apart from the crowd that is worth listening to.

I have set up RSS links to some of them on our link bar, and will add more from time to time. Just remember where you heard this – the American rust belt (Michigan, Ohio, Indiana, Western Pennsylvania) is transforming itself. There is a renaissance taking place in Detroit. It is reinventing itself as a city.