When I got engaged, I told my fiancee that the way to give our marriage the absolute highest probability of success was for her to simply have low expectations for me. Seven wonderful years later, this instruction seems to have worked!
While there's a little humor in the story above, there's also a great deal of truth and value to it. Every relationship has periods of disappointment, but these will feel minimal if you set your expectations low -- something that wise investors understand.
Mr. Market is a bipolar creature of extremes: He loves high expectations and loathes low ones. That's something investors can take advantage of by staying away from stocks during "high-expectation" periods and investing heavily during "low-expectation" ones.
After all, stocks are likely to be extremely overvalued when Mr. Market's expectations are high. Conversely, extreme bargains and opportunities will typically surface whenever expectations are low.
Consider these two recent examples:
Expectations were quite high for consumer-oriented Internet stocks like Amazon (AMZN) and Netflix (NFLX) when 2016 began.
AMZN in particular had rallied by nearly 100% in 2015 thanks to tremendous tailwinds. Its cloud business was a lot more profitable than anyone had suspected, while the company's e-commerce efforts continued to grow rapidly. Expectations were high ... but Amazon shares are down nearly 10% so far this year.
By contrast, the energy sector entered 2016 with the absolute lowest of investor expectations. Many people were dumping their energy stocks, while some hedge funds looked smarter every day by going short on the sector.
Ultimately, the segment reached its maximum point of pessimism when oil prices crashed below $30 a barrel. But guess what the market's best-performing sector is today? You got it: Energy stocks.
Mr. Market's expectations were that the majority of energy companies were simply going to collapse, so it took very little positive news for the sector to rally. While energy stocks remain in a difficult spot even now, it's probable that many have already seen some of their best gains.
The Bottom Line
Warren Buffett once said it best: "You pay a dear price in the stock market for a cheery consensus."
And I believe he was also implicitly saying the reverse as well: "You can often find bargain prices amid a miserable consensus."