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What is your investing edge?
When someone says they have an investing "edge", they mean that they have some sort of advantage that allows them to consistently generate higher returns compared to the average investor.
Investing “edges” come in a variety of sources. This includes actual investing edges like superior industry knowledge or analytical skills.
Or they can include “pretend” investing edges, like people who try and day trade the market or copy politicians’ trades (both horrible strategies).
But there's one investing edge everyone can take advantage of...
…and that's the magazine cover strategy.
A Walk Down Memory Lane
Do you remember when Russia invaded Ukraine in February 2022?
It was pure chaos in the market. Stocks were crashing, crypto cratered, and commodities like oil, natural gas, and wheat went to the moon.
There was a logical explanation for this, as Russia and Ukraine accounted for more than quarter of the world’s wheat production in early 2022:
If the countries were at war, it meant that there would be fewer bushels of wheat on the market. This pushed up prices to levels not seen in decades, with some claiming the “global wheat supply” would be threatened:
This led to leading financial publication The Economist publishing an issue with the title, “The Coming Food Catastrophe”:
But as I’m sure everyone who’s bought bread, pizza, or pasta in the last year, you can confirm a “food catastrophe” did not come to pass.
In fact, The Economist magazine cover published on May 19, 2022 nearly the exact top for wheat prices…
…as wheat prices are down -50% since.
It Pays to Be Contrarian
There are countless examples of this "magazine cover” strategy playing out.
For instance, leading investing publication Barron’s published this on October 10, 2022…
…which was the peak of the two-year US dollar bull run:
Or in the other direction, look at The Economist cover from September 29, 2022…
…which was published near the exact bottom in the UK stock index (which is +15% since):
Or what about when Elon Musk was named Time’s “Man of the Year” on December 13, 2021…
…which was nearly the exact top for Tesla (TSLA) shares, which are down -73% since:
It may seem like something nefarious is going on. But I assure you, the explanation for this phenomenon is something we’ve covered many times before.
Market Sentiment Drives Everything
Magazine covers are often a contrarian market indicator because they tend to reflect the prevailing sentiment of the market at a particular time.
When a market is at an extreme, either in terms of bullishness or bearishness, magazines like The Economist, Business Insider, and Time often run cover stories that reflect this sentiment, either in a positive or negative light.
As the saying goes, "when everyone is thinking the same thing, no one is thinking".
This means that when the market sentiment becomes too one-sided, it can signal that the market has become overbought or oversold and is due for a reversal.
This is because when the majority of investors have already bought into a particular trend or idea, there are fewer potential buyers left to push the market even higher, or more potential sellers left to push it lower.
Therefore, when a magazine cover becomes too bullish or bearish on a particular market, it can be a warning sign that the market is due for a correction.
And there’s empirical evidence to support this.
Putting this Strategy to the Test
The “magazine cover” strategy has long been discussed on Wall Street.
But it was never formally studied until Brent Donnelly of Citigroup researched the topic. Donnelly selected 44 covers of The Economist from 1998 to 2016 that seems to make an optimistic or pessimistic point.
And what he found was interesting; 68% of the time the covers were a contrarian sentiment indicator. In other words, the covers were more-often-than-not sentiment peaks.
And this isn’t a new phenomenon. Two very famous examples are when BusinessWeek’s cover screamed: “The Death of Equities”, at the stock market lows in 1979…
…or when The Economist proclaimed the world to be: “Drowning in Oil” just as oil bottomed in 1999:
The people who create magazine covers are trying to play into something called “confirmation bias,” or the tendency to seek out information that confirms your pre-existing beliefs.
If you’re bullish on Tesla, the US dollar, or wheat prices, magazine publishers want to create products - like a cover confirming that bias - that reinforce what you think.
Magazine publishers use their confirmation biased covers to sell you subscriptions.
But savvy investors - including me - use them to make investment decisions.
“Zig” When Everyone Else “Zags”
I’m not saying to simply go out and bet against every magazine cover you see.
However, they are a good way to gauge market sentiment, which - as we’ve discussed many times - is one of the best ways to determine when to enter and exit positions.
Because when everyone is thinking one way, it’s usually a good time to take the other side of that bet.
Stay safe out there,
Robert