Why Investors Ought to Seek Profits from Market Overreactions

Just how much equity markets overreact at a given point in time can be debated. Some may suggest that equities are priced to near perfection, with a large enough sample size of investors as to render the sample "perfect," suggesting that the current market prices for any company are correct, at any given time, adjusted for the average risk profile of the group of investors which make up the investing public.


Such a perspective is intriguing, however, I remain in the camp of believers that excess return, or alpha, remains for those who are willing to take the risk and invest in those firms which are undesirable to the many investors but which provide undeniable upside to the masses, at a given intersection in time.


Such a viewpoint is held by FMI Large Cap (FMIHX), a fund which has continued to pick out of favor stocks for quite some time, to the applause of many investors who have benefited from such as strategy over time.


Of course, picking out of favor stocks in the hopes of finding one or two that outperform the broader index in a significant way has its downside.


One of the most cited examples of the downside of such a strategy is the early exit of a long-term investor's dream, Microsoft Corp. (NASDAQ:MSFT), from the fund just recently, given the apparent detachment from fundamentals and the growth story which underpins the technology behemoth.


For investors serious about pursuing contrarian investing strategies, picking a fund like the FMI Large Cap could prove to be very well timed, given the high valuation benchmark which has been pressed upon investors in recent years.


For those who are bearish, funds like this one come few and far between, and I remain in the camp that believe that FMI Large Cap and other funds will outperform in the medium term relative to their peers.

Invest wisely, my friends.

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