TAG | contrarian investing
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Investing in Stocks: Ignore the Negatives, Embrace Your Contrarian Side and Buy Stocks Now
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Investing in Stocks: Ignore the Negatives, Embrace Your Contrarian Side and Buy Stocks Now
by Alexander Green, Investment U’s Chief Investment Strategist
Tuesday, September 7, 2010: Issue #1338
When the Dow bottomed near 6,500 in the thick of last year’s financial crisis, few investors thought it was a good time to buy stocks. Sentiment was overwhelmingly bearish.
So when the market bounced higher, the consensus was that it was a “dead-cat bounce,” a bear-market trap. But it wasn’t.
As the rally gained speed, investors began to think that perhaps the worst of the financial crisis was indeed over and they would buy some stocks on a retracement or when the market tested its lows.
But that didn’t happen either. In fact, the Dow didn’t tire until it crossed 11,000 in May. By then, the market was up over 70% in just 14 months.
That was pretty depressing to investors sitting on the sidelines, earning microscopic yields on their cash. Many were so busy licking their wounds from the sell-off that they made little or no new investments during the rebound.
So what should you do now?
Investing in Stocks: Follow the Earnings
Since the market high four months ago, the Dow has lurched back and forth. But the primary direction has been down. No surprise here. After a rally of this magnitude, a correction is not unusual.
But don’t be like last year’s investors and miss the next rally. Now is a good time to put money to work in high-quality stocks.
In fact, the market is almost as cheap today as it was during the depths of despair in March 2009.
How is that possible when the Dow is more than 3,500 points higher?
Because a stock or index price doesn’t tell you anything about valuation. What matters are earnings and the multiple that the market puts on them.
Three Reasons Why You Should Buy Stocks Today
When measured by profits, the market is almost as cheap today – at 14.9 times trailing earnings and 12.2 times prospective earnings – as it was in March last year.
That’s because earnings are up. Way up. Second quarter profits at U.S. companies hit an all-time record.
A year and a half ago – when investors should have been buying stocks – the media was busy telling them about The Great Recession and how the world was coming apart at the seams.
Today, it provides saturation coverage of home foreclosures, personal bankruptcies and endless political carping. And because we’re blanketed with bad news, few investors see the positives. Consider, for example:
- The Fed has taken interest rates to near zero. That makes it cheaper for consumers and businesses to borrow. It also makes ultra-low-yielding cash a horrible investment.
- Inflation – the great bane of both stock and bond investors – is M.I.A. With the consumer price index showing virtually no increase, businesses don’t have to battle rising costs.
- Around the globe, most stocks are unloved and undervalued. Historically, when the P/E of the S&P 500 has dropped dramatically – as it has since the highs of May – it isn’t long before the market puts on a significant rally.
A Leaner Corporate America Could Drive the Next Rally
I know analysts are saying that earnings won’t be anything great. But they could be wrong – yet again – for two key reasons.
- Businesses have tightened up their cost structure, laid off unnecessary personnel and refinanced debt at lower levels. Even a modest uptick in sales could deliver surprisingly good bottom-line growth.
- It’s so cheap for businesses to borrow right now that I expect we’ll see many of them issuing debt to buy back their own shares. This could lead to robust growth in earnings per share, even if growth in gross earnings is less dramatic.
The bottom line?
Investing in Stocks: The Ultimate Contrarian Indicator Right Now
Stocks today are almost as cheap as they were when the Dow hit 6,500 18 months ago. And the macro-economic picture – while always cloudy – is a heck of a lot better now than it was then.
As an investor, look at your options. Cash pays next to nothing. Treasuries yield little more and could easily drop precipitously. Real estate is a non-starter, due to illiquidity, a flood of foreclosures and tough new lending rules.
But stocks offer excellent potential. And if you know anything about contrarian indicators, the fact that so few believe it only confirms it.
Good investing,
Alexander Green
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Why the Euro Has Further to Tumble
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Why the Euro Has Further to Tumble
by Alexander Green, Chief Investment Strategist
Thursday, May 6, 2010: Issue #1254
Being a contrarian is a lonely business.
If you’re a regular reader, you’ll know that ordinarily, I am market neutral on stocks, bonds, currencies and commodities.
The truth is that markets are reasonably efficient. So most years, I don’t stick my neck out and make any market calls on any asset class.
That’s because the vast majority of the time, most assets are neither grossly undervalued, nor wildly overvalued. Rational, self-interested investors keep prices close to true value.
But I am not an efficient market theorist. Investors are always self-interested, yes. But they are not always rational. And I most certainly do not believe that all publicly traded securities are efficiently priced all the time.
That would be lunacy…
Anomalies develop (and opportunities alongside them). Sometimes, these anomalies develop into outright bubbles. When that happens, you will always see eye-popping valuations paired with extreme sentiment. (In other words, sky-high prices and unbridled optimism or rock-bottom prices with extreme pessimism.)
What surprises me is how few investors recognize a bubble, even when it’s right under their nose and they have many thousands of dollars at risk…
Bubble Watch
For example…
- When I warned about the dangers of Internet stocks over a decade ago – I actually quit my Wall Street firm to take possession of my soaring pension shares – most respondents told me I was clearly ill-equipped to recognize the nature of opportunities in “the New Era.”
- Readers similarly scoffed at my warnings about the housing market five years ago. “Real estate always goes up,” they reminded me.
- At $150 a barrel, I wrote a column calling oil “The Mother of All Bubbles.” Demand was already waning and supply was rising as oil hit a new all-time high on various “peak oil” theories. It then quickly lost nearly two-thirds of its value.
- Five months ago – again, right here in Investment U – I predicted that the much-maligned dollar would soar against the euro. And yet again, my readers insisted that I was grossly mistaken and that a weaker dollar was “the ultimate no-brainer.”
Except it wasn’t…
Europe’s Monetary Policy Mish-Mash
Today, the euro hit a 14-month low against the dollar ($1.2689) on increasing recognition that Greece’s fiscal problems are bigger than expected, more expensive than expected and potentially contagious.
Trust me, this is far from over. The 16-member states in the Eurozone are about to start bickering like an old couple that has locked the keys in the car.
Understandably, weaker states don’t like having their economic policies dictated from Frankfurt. And stronger states don’t like spending billions to bail out their profligate brethren from years of fiscal mismanagement.
“Preposterous” Expectations for the Euro Against the Dollar
When the euro was born on January 1, 1999, skeptics rightly worried that the then-11-member states were too divergent to share a single currency and monetary policy.
These fears were well-founded. And the euro promptly plunged on world currency markets to well under $0.90. Today, we know that problems among member states aren’t just possible… not just probable… but right here, stinking to high heaven on our doorstep.
Yet the euro is still trading around $1.27.
Expect it to hit $1.10 by the end of this year – and trade at parity with the dollar sometime next year.
Sounds preposterous? Yes, so I’ve heard.
Good investing,
Alexander Green
Editor’s Note: Find out how The Oxford Club’s “market neutral” investment approach, combined with a keen eye for lucrative contrarian recommendations, led the Hulbert Financial Digest to rank the group’s Communiqué in the top five investment newsletters over the past 10 years.
Sign up for a risk-free trial today and you’ll get all the latest investing ideas, insights and recommendations from our analysts that will give you the opportunity to make consistent profits year after year. Check out the full list of benefits here.
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Timing the Market: If Only You Knew What Mark Hulbert Knows…
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Timing the Market: If Only You Knew What Mark Hulbert Knows…
by Alexander Green, Chief Investment Strategist
Monday, April 26, 2010: Issue #1246
For over a decade, I’ve been telling readers that timing the market isn’t just unhelpful… it actually hurts performance.
Now the evidence is even more definitive…
Sure, it’s easy to look back and see exactly when you could have been in or out of the market for maximum performance. That’s the beauty of hindsight.
But when you look ahead, things get a whole lot cloudier. So if you’re even thinking about jumping in or out based on some guru’s system or “market outlook,” listen up…
Trying to Time the Market? Don’t Do It!
The Journal of Financial Economics, an academic journal, recently published a new study – “Measuring Investor Sentiment With Mutual Fund Flows.”
Using easily available public information published by the Investment Company Institute, a mutual fund trade organization, the researchers focused on investor exchanges out of stock funds into bond funds and vice-versa.
This led to an interesting discovery…
- The research shows that market timers, as a group, have god-awful instincts. In fact, you could hardly find a better investment system than to do EXACTLY THE OPPOSITE of what they’re doing.
- The researchers built a hypothetical portfolio going all the way back to 1984 and switched back-and-forth between the S&P 500 and 90-day T-bills. They did the mirror opposite of what mutual fund flow figures showed switchers were doing.
- Over the next 25 years, the portfolio produced an annual return of 12% – 1.6% a year better than merely buying and holding the S&P 500.
To put this in concrete terms, buy-and-holders turned a $10,000 initial investment (with dividends reinvested) into $118,639 over the period.
Those who did the opposite of mutual fund timers, however, turned the same $10,000 into more than $170,000. (Most fund switchers, on the other hand, did about as well as someone betting on black or red at the roulette wheel.)
That’s not the best part, however…
An Impressive Performance… For Serious Contrarians Only
What makes these numbers even more impressive is that the contrarian portfolio took on far less risk than being fully invested in stocks. After all, it was invested in riskless T-bills nearly half the time.
I’m not actually recommending that you follow this strategy, incidentally. For one thing, past performance – as every investment prospectus reminds you – does not guarantee future results.
Plus, 25 years as a portfolio manager and investment writer have proved to me that the overwhelming majority of investors lack the emotional discipline to invest contrary to the crowd. (So when the chips are down, you may still be out.)
As Mark Hulbert, editor of the independent Hulbert Financial Digest, concludes, the average investor “would be far better off if he never engaged in market timing.”
The Oxford Club doesn’t. And it shows in our results…
A Top Five Ranking for 10 Years Running
Of course, every newsletter editor brags that his investment letter gives superior returns. The industry bears an uncanny resemblance to Lake Wobegone, where “all the women are strong, all the men are good-looking and all the children are above average.”
It’s worth noting, however, that Hulbert ranks The Oxford Club Communiqué among the top five letters in the nation for risk-adjusted performance over the past 10 years.
That allows us to give entirely honest answers to the two most commonly asked questions:
- “How has your investment advice worked out?” – Beautifully.
- “What do you think the market will do next?” – We haven’t the foggiest notion.
Good investing,
Alexander Green
Editor’s Note: Are you trying to time the stock market? Don’t! There’s a better way to tackle the investing process: let some of the best, most successful analysts in the business do the work for you.
The Oxford Club’s pragmatic, “market neutral” approach has generated consistent, impressive results for many years, based on real facts, information and numbers that matter, not arbitrary stock market indicators or timing.
For more details on how you can profit from the stocks in The Oxford Club’s Communiqué portfolio, please visit this link. You’ll see why the Hulbert Financial Digest has ranked the Communiqué in the top five investment newsletters over the past 10 years and get the latest investing ideas, insights and recommendations that can make you money for the next year and beyond.
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Your Best Investment Strategy for 2010… And Beyond
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Your Best Investment Strategy for 2010… And Beyond
by Alexander Green, Chief Investment Strategist
Monday, January 4, 2010: Issue #1167
At 11:38 AM on January 28, 1986, the space shuttle Challenger lifted off its launch pad at Cape Canaveral in Florida.
Seventy-four seconds later – and 10 miles higher – it blew up.
The launch was televised live, so the news spread quickly.
The stock market didn’t stop to mourn…
Within minutes, investors began bailing out of the four major shuttle contractors:
- Rockwell International, which built the shuttle and its main engines.
- Lockheed Martin, which managed ground support.
- Martin Marietta, which manufactured the ship’s external fuel tank.
- Morton Thiokol, which built the solid-fuel booster rock.
All four stocks were hit hard initially. But by the end of the day, three of them were down just slightly. Only Morton Thiokol closed sharply lower.
While there were no public comments that day singling out Thiokol as the guilty party – and it would be six more months before a Presidential Commission revealed that the company’s O-ring seals were the culprit – the stock market almost immediately labeled Thiokol as the company responsible for the disaster.
So how did the market know something that even NASA scientists didn’t? Author James Surowiecki calls it “the wisdom of crowds.” And there’s evidence of it all around us…
Follow the Experts or Follow the Masses?
Take the economy, for example. No individual is smart enough to know where to put the dry cleaners, tire stores, banks, or coffee shops in your community. But rational, self-interested people – as if directed by Adam Smith’s famous “invisible hand” – will provide what we need, where we need it and when we need it.
That’s why free markets work and command economies don’t.
Or consider the TV show “Who Wants to Be a Millionaire?” When a contestant got stuck on a question and was allowed to ask an expert of his choice, the expert gave the right answer 65% of the time. But when the contestant polled the audience – a random group of people with nothing better to do on a weekday afternoon than sit in a TV studio – they picked the right answer 91% of the time.
My point? We prize and honor individual intelligence. Yet counter-intuitive as it seems, crowds are usually smarter than the experts.
Unfortunately, they’re also more emotional. And that often leads to disaster. Especially when it comes to investing…
The Madness of Crowds
Over the last decade, look at where the mob has taken Internet stocks, residential real estate and the entire stock market (on both the high and low sides).
As Charles Mackay wrote in Extraordinary Popular Delusions and the Madness of Crowds:
“Men, it has been well said, think in herds. It will be seen that they also go mad in herds, while they only recover their senses slowly and one by one.”
This investment classic was published in 1841 – and those words are still true 169 years later. So when the herd begins to stampede, there is only one intelligent thing to do: Get the heck out of the way.
It’s called contrarian investing – and we’ve used it to capitalize on, and avoid, a number of dramatic developments in recent years. That includes dodging the overheated real estate market… selling $150-a-barrel oil… and buying great companies at a 13-year low last March.
However, you can’t bet against the crowd every day and expect to win. That’s simply blind contrarianism and it doesn’t work.
Remember, you aren’t right simply because you agree or disagree with the crowd, but only when your facts and reasoning are right.
Against Conventional “Wisdom,” Expect This Currency to Rally in 2010
Nevertheless, history shows that investment opportunities are greatest when extreme valuations are combined with extreme sentiment. When euphoria greets high valuations and there’s abject pessimism over low valuations.
This doesn’t occur every day, of course. Under ordinary circumstances, most assets are neither an immediate sell nor a table-pounding buy.
Yet three weeks ago, I made the case that based on fundamentals and sentiment, the U.S. dollar is oversold and is likely to soar in 2010. The greenback hasn’t waited for the New Year, however. It put on an impressive rally in December.
Are we at the inflection point when the greenback makes a sustained move up against the world’s major foreign currencies? I think so.
The structural imbalances in U.S. trade and fiscal policy are already reflected in the price of the dollar. Major European economies and Japan are hurting more than we are. And over the second half of the year, Ben Bernanke is likely to start mopping up the excess liquidity he created by raising short-term interest rates. That will only add fuel to the dollar’s rally.
In short, expect a sea change in the way “the crowd” views the dollar this year. And adjust your portfolio accordingly.
Good investing,
Alexander Green
Editor’s Note: For much more on how to organize your investment portfolio this year – and put yourself in the best position to make money in what should be another challenging year for investors – Alexander Green wants to extend a personal invitation to you.
It’s a chance to join one of the most exclusive investment clubs around – one that he oversees personally and includes some of the most successful investors who know that it’s possible to make money in any market climate.
The Club strives to give its members the best possible wealth-building ideas and investment recommendations – and its performance has resulted in the independent Hulbert Financial Digest ranking its investment newsletter in the top five in the United States over the past decade.
So kick off 2010 on a great note and see how you can become a member, too.
