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By William Housley and my thinking partner AI (GPT-5)
A Changing Market Mood
William: It seems like the market is running on excitement. The big AI stocks are still climbing, and anyone who hesitates feels like they’re missing the boat. When everything moves that fast, can a contrarian approach really work anymore?
AI: That’s a question investors have wrestled with for centuries — what happens when momentum becomes the market itself? When enthusiasm is this powerful, it can lift entire indexes, at least for a while. But eventually, valuation and reality always reconnect.
The Power of Momentum
AI: Momentum investing thrives on belief. A promising idea — like artificial intelligence — spreads from labs to boardrooms to every news feed. Capital follows the story. Prices rise not only because profits are growing, but because confidence is contagious.
William: It’s easy to see why. These technologies are remarkable. They’re reshaping how people work and think. So, investors want to be part of it.
AI: Of course. Every major innovation attracts excitement. In the 1990s it was the internet. In the 2010s, smartphones and cloud computing. Each wave began with legitimate breakthroughs — but each also reached a point where expectations grew faster than earnings. Momentum can take prices higher than reason can justify, and for longer than most expect.
The Contrarian’s Patience
William: That’s where the contrarian investor steps back, right? When optimism feels unstoppable.
AI: Exactly. Contrarians aren’t pessimists — they’re realists. They look for areas the crowd has abandoned. While momentum traders chase what’s soaring, contrarians quietly accumulate what’s stable, dull, or undervalued. Their edge isn’t speed; it’s discipline.
William: But it’s hard to sit still when everyone else is celebrating.
AI: It is. Contrarian investing feels wrong in the moment. The market rewards conformity — at least temporarily. But when the cycle turns, what once looked boring often becomes beautiful again. History rewards those who can stay calm when enthusiasm peaks.
The Risk of Being Right Too Soon
William: The problem is timing. If you buy too early, you might watch a stock fall for years before it recovers.
AI: True. Being contrarian doesn’t mean fighting the crowd for its own sake. It means recognizing when prices and fundamentals have drifted too far apart — and then having the patience to wait for the two to meet again.
Howard Marks once said, “Being too far ahead of your time is indistinguishable from being wrong.” That’s why successful contrarians combine humility with conviction. They’re not betting on panic — they’re betting on eventual clarity.
Speed Versus Substance
William: Momentum seems like a racecar — fast, thrilling, and dangerous. Contrarian investing is more like walking uphill — slow and steady, but exhausting.
AI: That’s a good analogy. Momentum feeds on emotion; contrarian value depends on gravity. The crowd’s energy can push markets higher in the short term, but it rarely lasts. When momentum runs out of buyers, gravity takes over.
William: So both approaches work — just on different timelines.
AI: Exactly. Momentum rewards the impatient; contrarian investing rewards the disciplined. Both have seasons. The challenge is knowing which season you’re in.
Recognizing Excess
William: How can an investor tell when enthusiasm has gone too far?
AI: When people stop asking whether prices make sense. During bubbles, investors justify valuations with phrases like “this time is different.” You start to hear about companies valued at hundreds of times earnings — or even with no earnings at all — because “growth will take care of it.” That’s the moment of danger.
William: So the contrarian doesn’t deny innovation — just the idea that every innovation is worth any price.
AI: Exactly. A contrarian can admire progress while refusing to overpay for it. They might invest in the overlooked parts of an industry — the suppliers, the energy infrastructure, the logistics behind the scenes. Value often hides where the spotlight doesn’t shine.
Blending the Two
William: Maybe the smart answer isn’t choosing one side or the other — but blending both. Ride the wave, but anchor the boat.
AI: Well said. A thoughtful investor can participate in strong trends while keeping a foundation in value and stability. Enjoy the momentum, but don’t mistake it for permanence. Balance enthusiasm with skepticism. Growth and prudence aren’t enemies — they’re partners.
William: That balance sounds boring compared to the excitement of a market boom.
AI: It usually is — and that’s what makes it powerful. Excitement fades, but patience compounds.
The Human Factor
William: In the end, it seems this is more about temperament than tactics.
AI: Absolutely. Greed and fear still run the market, even when the story changes. Most people buy when it feels safe, which usually means after prices have risen. Contrarians learn to feel safe when prices are low and fear is high. It’s counterintuitive — and that’s why it works.
William: Buffett said, “Be fearful when others are greedy, and greedy when others are fearful.” That’s timeless, but hard to live out.
AI: Yes. The best investors don’t need to be smarter than others; they just need to stay calmer longer.
The Lesson Beneath the Headlines
William: So the contrarian way isn’t about rejecting progress. It’s about understanding cycles — emotional, financial, and historical.
AI: Exactly. Every market cycle begins in innovation and ends in overconfidence. The contrarian doesn’t curse the cycle; they prepare for it. They keep dry powder for when prices fall and humility for when they rise.
William: And meanwhile, the headlines will keep telling us the next thing is unstoppable.
AI: They always do. But the laws of investing haven’t changed: value matters, cycles repeat, and risk never disappears — it just hides in popularity.
Closing Reflection
William: So if momentum is the wind, contrarian investing is the keel that keeps the boat upright.
AI: Perfect metaphor. The wind gives speed, but the keel gives direction. Without it, even the fastest ship eventually capsizes.
William: Then maybe wisdom in this moment means holding both truths — respecting innovation, but remembering gravity.
AI: Yes. Markets rise on dreams but endure on discipline. The best investors learn to balance both — hope for the future, and patience for the turning of the tide.
The main problems
Buffett said “Diversification is protection against ignorance. It makes little sense if you know what you are doing”. For the masses he recommended the SP500 which again is DO NOT diversify.
I took his ideas and invested only in great risk/reward 2-5 mutual funds according to what markets have done lately.
Since retirement I have used only 2-3 bond mutual funds.
Since I have enough since retirement in 2018, I decided to use only special bond funds. I made 11+% annually.
Last year I mentioned HOSIX. What did HOSIX make during 2023-24?
20+%. https://schrts.co/xqhNhiJK
I sold it in 2025.
What funds have done well in 2025 and in the last 3 years?
EGRIX: https://schrts.co/HAtAsnGc
3 years: https://schrts.co/YHVYsWqZ
If you want to own stocks with lower volatility. How about QLENX
YTD: https://schrts.co/VcHsPnCr
The last 3 years: https://schrts.co/EWsjrFQh
There are many skeptics because they don’t believe in it, but they never tried. Many tried but didn’t try enough.
I will give you one easy example, and it’s free for anyone to use.
Fidelity had a FREE fund screener. Suppose you want to find good risk/reward funds. That means funds with the highest Sharpe ratio.
Start at https://fundresearch.fidelity.com/fund-screener/
Click on the RISK tab and sort by the highest Sharpe.
The link below will show you HOSIX=HOSAX,QLEIX=QLENX
https://fundresearch.fidelity.com/fund-screener/results/table/risk/sharpeRatio3Yr/desc/1?assetClass=&category=&order=assetClass%2Ccategory
How much time do I spend on finding great funds? Maybe one hour every several funds. I also use timing and switching. That took years of training. You can’t learn to swim by reading a book; you actually have to do it.
BTW, when you have enough, it’s much easier. It means you can be in 20-80% stocks and do nothing for decades. More than 80-85% of investors don’t have enough. What should they do?
Warren Buffet has said, Be fearful when others are greedy, and greedy when others are fearful.” Easier said than done. If markets go down 10% and you bought, you raised your risk if markets go down another 20% because you would lose more than just doing nothing.
If you wait too long, markets may have already recovered.
There are solutions. 🙂
I never play contrarian. I only play according to markets currently. Always long, but rarely I’m out.
Warren Buffet has said, Be fearful when others are greedy, and greedy when others are fearful.”
I utilize this theory but yet in the realm of index funds. When the equity allocation in our portfolio is out of balance I rebalance to the target allocation, usually banking increased equity value and “banking it as savings” in bonds. Does this mean by not waiting until a higher percentage off balance means I may be missing out on additional “profit”? Probably so. But I have “enough” so I don’t feel the need to get greedy.
Buffett has recommended everyone should read Ben Graham. Graham suggested a stock allocation spectrum, ranging from 25% when stocks are overvalued to 75% if undervalued, with the balance invested in bonds. Interestingly, this advice did not take into account the age or time horizon of the investor.
As for your comment about rebalancing too early, I hear you. In retrospect, my portfolio today would be larger, had I not rebalanced when I did. By the way, Jonathan had mentioned this momentum effect, hinting one could allow the stock portion to rise a bit higher before rebalancing. This continued increase in the stock valuations after rebalancing means the safety we hope to get from rebalancing comes at a price. I think the regret we may feel about this will be offset on those occasions when the market falls after rebalancing.
On the one hand, articles about the continuing bull market stir feelings of FOMO and regret for my not holding more stocks. But simultaneously appearing articles about the market being overpriced counterbalance those feelings.
So, after using some “very high level math”, I came up with a solution to the dilemma: 50% Stocks/50% Cash plus Short-term Treasurys/TIPS. Somewhat protected from a bear market, somewhat positioned to cash in on the continuing (so far) rise in equity prices. Finally, my planning, unlike Graham’s advice, does take into account where I am in my life cycle. I’m 72 and have been retired for over 7 years. A younger person with a much longer horizon might choose a more aggressive allocation.
My allocation is similar to yours Jack: 45/45/10
That’s a great comment. It really makes me wonder — when do we actually hit the point of “enough”? I’d like to think more about that and where it leads. If we’ve reached “enough,” does that mean we can take a little more risk with part of our portfolio?
Thanks William. Once we claim Social Security at 70 and I have solid numbers to work from I plan on instituting a true bucket strategy. But for the next two years I’m planning on being on the more conservative side. Also that will be eight years into retirement so essentially past the sequence of returns risk.
Or, as William Bernstein might advise, does it mean there’s no longer a reason to take as much risk, and that we shouldn’t?
Actually, Bernstein only says that we shouldn’t risk losing the money that we can’t afford to lose. Our overriding goal should be not to run out of money and Bernstein recommends a conservative approach to ensuring that we don’t. If we have additional money after meeting this goal then Bernstein is fine with our risking money that we can afford to lose.
For those fortunate enough to succeed in amassing “enough”, anything beyond that amount can be thought of as surplus. The question is whether and what to do with the surplus. One could leave it untouched, providing a “margin of safety”. Or, do something different with the surplus.
To paraphrase Bill Bernstein: Once you have accumulated “enough” and put it all in secure investments (such as TIPS and normal treasurys) any remaining amount can be considered as your “risk portfolio” and invest it in any manner you wish. Of course, the reader should read his actual words in his revised edition of “The Four Pillars of Investing”. Incidentally, I found the most interesting part of this book to be his comments on how his thinking has evolved since the publication of the first edition.