contrarian investing

Rule #2

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We often talk about our three fundamental principles of investing. Rule #2 is ‘Buy the best bargains.’ This is our intent, but we must act on what we know, which is incomplete. Our crystal ball does not actually work; we do not know the future. No guarantees.

The best bargain is likely to be unpopular – or else it might not be a bargain. We often buy into sectors that are down sharply from much higher levels, years before. The crowd is almost never rushing into shares that have declined 50 or 80% over a period of years.

This matches up nicely with our contrarian philosophy, doing our own thinking, going our own way. In fact, we believe that profit potential lives in the gap between the consensus expectation and the unfolding reality. We think there is an edge in finding a lonely, but correct, position.

There are different categories of bargains. The best bargain might be a cyclical investment at the low point in its cycle – homebuilders in recession, for example. Or a wonderful, durable blue chip company available at a temporarily low price because of some short-term issue. Or a deeply discounted bond in a stressed company that we figure is trading below liquidation value. No guarantees, as we said!

Our approach is not the only one. Some believe in buying only when an investment is already in a clear up-trend. Others want to own the things that are on the magazine covers, the ones everyone is talking about. For better or worse, we do our best to stick to our convictions. (And sometimes they are better, and sometimes they are worse.)

The value style, our philosophy, is right for us. Clients, if you would like to talk about this or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

A Better Topic Than “The Market”

© Can Stock Photo / Pedxer

Everybody talks about it; it raises a lot of questions. Is the market too high? Where will it go next? Is it due for a fall? How will the economy affect it? (Or politics, or world affairs, or astrology?)

Many people seem to be referring to a major market average or index when they talk about the market. But the investment universe is far broader than those. The individual pieces may have little to do with what is happening with the major averages.

  • For example, even when the averages are near all time highs, stocks in some industries or companies may be half or less of their own highs from years ago.
  • The United States is not the only advanced economy in the world with a stock market. Some overseas markets have done very little for a decade, and are not close to high points.
  • Certain holdings have shown a tendency to go the opposite direction from the major averages.
  • Even with in the US stock market, some holdings appear to be bargains even when highflyers have gone off the charts.

Instead of asking those questions about “the market,” we think it makes more sense to always be asking these questions:

  • Where are the best bargains in the investment universe? We should be looking at them.
  • Where are the stampedes? We should avoid them.
  • Is there a way to secure reliable income in today’s environment?

This is a way to bring the focus to something useful, in our opinion. Clients, if you would like to talk about this or anything else, please email us or call.© Can Stock Photo / Pedxer

To Everything There is a Season

© Can Stock Photo / jordache

After a long and snowy winter, spring has finally arrived in Nebraska, and it is wasting no time. The weather may be nicer, but the sudden thaw and ensuing floods have turned much of our state into a disaster zone.

While tragic, this was a long time coming. Most folks saw how much snow had accumulated through March and knew that it would be trouble when the weather warmed up. We all know how the cycle of the seasons work, and it should be no surprise that winter is followed by spring.

The markets, like the seasons, are cyclical. After a certain point, a bull market turns into a bear market, and vice versa. Summer turns into winter; winter turns into spring. But investor behavior can sometimes overlook this important fact.

Imagine if someone looked around at how cold and snowy it was at the beginning of the month and said “There’s even more snow than there was last month! At this rate there will be two feet of snow on the ground by May!” Obviously, they would sound quite foolish.

But is this really any different than investors who, late in a market rally, say “The market is higher than ever! At this rate it will be even higher in a few months!”

We know how market cycles work. Like the weather, we are not able to predict exactly when the turning point will come. But we know that it will happen eventually, and as contrarians the stronger the trend is the harder we expect the turning point will be.

Sometimes we temporarily look foolish—a bubble may persist for years after we expect it to burst. The fellow predicting snow in May probably would have felt vindicated by how much snow got dumped on us the first half of March, after all. We would rather miss out in the short term than miss a key turn in the markets altogether, though.

To everything there is a season: a time to buy, a time to sell. Clients, if you want to talk about the markets (or the weather), please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Stock investing involves risk including loss of principal.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Hit ’em Where They Ain’t

© Can Stock Photo / dehooks

Investors can learn a lot from Willie Keeler, one of the smallest major league baseball players in history. Wee Willie stood 5’4” and weighed 140 pounds.

Playing from 1892 to 1910, Willie was a prolific hitter, with a batting average of .345 over that long career. He explained his success with words that have become part of baseball lore:

“Keep your eye on the ball, and hit ‘em where they ain’t.”

We believe it makes sense to strive to understand investment opportunities, researching companies, trends, and economic developments to try to gain an edge. This is what it means to “keep your eye on the ball.”

As contrarians, we seek to avoid stampedes. If the crowd is there, we probably want to be somewhere else. As Warren Buffett once said, “be greedy when others are fearful, and fearful when others are greedy.” Isn’t this the investment version of “hit ‘em where they ain’t?”

It would be interesting to know whether Wee Willie Keeler did any investing. Did his investing philosophy match his baseball hitting philosophy?

We cannot know the answer to that. But we do know, our investing philosophy matches up very well. “Keep your eye on the ball, and hit ‘em where they ain’t.”
Clients, if you would like to talk about his or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Stocks Have No Memory

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Clients sometimes bring up their own history with a particular investment in
trying to assess it. We sometimes hear things like this:

• “It’s done nothing but go down since we bought it.”
• “This is the most boring stock ever! It just lays there.”
• “At what point do you give up on waiting for it to turn around?”

As investors, our challenge is to form an opinion about the future value of prospective investments. Broad economic trends, industry developments, and company evolution may go into the mix. Reading annual and quarterly reports, checking our research sources, and looking at pertinent news are part of our routine. We frequently have to do some arithmetic, too.

Notice something missing from our recipe? Investment price performance does not go into the stew. Track record is not a factor for us personally. If you believe in buying low, you sometimes buy things with terrible recent performance. Conversely, some of the best track records in history belong to bubbles at their peak.

We aren’t saying our approach is the right approach. There is a whole school of thought that says you should only invest in things that are already going up—trend followers. But our approach is our approach, and we are unlikely to change.

Market values depend on the consensus opinion of the rest of the world. As contrarians, we look for potential gaps between the consensus and how we believe the future may unfold. No guarantees, of course—but we aren’t going to base investment decisions on a consensus that may be flawed.

Your stocks do not know how much you paid for them, or when you purchased them. We look at companies, not stocks—and make decisions in line with what we see. Opinions change, the consensus shifts, and we wait. Sometimes we look out of step for a time, perhaps years. That’s part of being contrarian.

Clients, if you would like to talk about this or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

 

Stock investing involves risk including loss of principal.

2019 Market Forecast

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It is that time of year. Prognosticators and pundits issue their forecasts for the year ahead. Wouldn’t it be nice to know what the future holds! Some forecasts are hedged, and don’t really say much. Our prediction is quite specific.

Many of those who have visited our offices know that we actually do have a crystal ball. It forecasts the direction of the stock market for the coming year. It does not say how far the market will go, but it always predicts the direction.

If you knew which way the stock market was going to go, could you make money investing?

Here’s the catch: our crystal ball has only been 74% accurate1. So perhaps the question should be, if you knew which way the stock market was going to go 74% of the time1, could you make money investing?

Without further ado, here is what my crystal ball says about the direction of the stock market for the year beginning January 1: it will go up.

Long-time observers will not be surprised. The crystal ball always says the market is going up. It has never predicted a down year. And checking back over the past hundred years, according to Standard & Poor’s, it has been right 74%1 of the time.

We don’t know how well its track record will hold up, but we believe this presents a favorable backdrop to buy bargains, avoid stampedes in the markets, and seek to own the orchard for the fruit crop. In other words, to keep on keeping on, following our plans and strategies.

It is tempting to include a discussion of the economy, the strengths we perceive, and the faint possibility of recession. We’ll leave that to people with more time on their hands. If your plans or planning will be evolving in the new year and require our attention, please call.

Notes and References

1. Online Data, Dr. Robert J. Shiller: http://www.econ.yale.edu/~shiller/data.htm. Accessed December 31st, 2018.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risk including loss of principal. No strategy assures success or protects against loss.

Buy Low, Sell High

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If you watch a lot of sports journalism, sooner or later you will see someone deliver some variation on this nugget of wisdom: “If we want to win, we just have to score more points than the other team.”

In investing terms, the equivalent is “If we want to make money, we just have to buy low and sell high.” This is just math: if you sell something at a higher price than what you paid for it, you make a profit.

The “sell high” part is usually easy for most people to grasp. Sometimes someone in a hot rally may get wrapped up in watching their gains go up and up and forget to cash out before things inevitably come crashing back down. But generally taking profits is fun and comes naturally to people.

It is the “buy low” part of the equation that people tend to struggle with more. Something in the news for being popular and making money is probably not trading at a low price. Buying low often means a metaphorical dumpster dive to find the unwanted dregs of the market. It is often not pleasant or easy to put your money in something that has a reputation as an unattractive investment. But if you want to buy low, that is where you frequently need to go.

The upshot is that this makes it a lot easier to get excited about a down market. It feels good to participate in a rising market, but it can be difficult to find spots to buy in when markets are up. For a value investor, market selloffs may lead to buying opportunities.

Clients, many of you already know what we are talking about. We are in business with you for a reason—we think you are the best clients in the world. We know it is not always easy to make disciplined investing decisions. But we think you have what it takes.

If you have questions about this or any other topic, please call or email us.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Honestly, It’s Not For Everyone

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Louisville, Nebraska has been the home of our business even before we moved into the office at 228 Main. It was our family home for many years before I started my practice, and it was from that home office that I struck out into business on my own.

I have mixed feelings about the great state of Nebraska. I enjoy seeing all of the friendly faces I know and love, and I look forward to many more days working in beautiful downtown Louisville. I do not look forward to spending several dozen more winters in Nebraska, but as you probably know, I have ways around that.

Nebraska’s tourism commission just unveiled a new ad campaign that embraces some of these feelings, announcing “Nebraska: Honestly, it’s not for everyone.”

Perhaps this slogan explains why the state is so near and dear to our hearts. We do not put much stock in advertising, but if we did, “it’s not for everyone” would be an apt slogan for our own business.

We are contrarians by nature. We like to think that we know what we are about, and through our communications, we hope we can give you some idea of what we are about as well. We do not have a lot of time to spend trying to be anything else. We know we are not always going to be a good fit, and would rather work with those we are than try to be everything to everybody.

We are definitely not for everyone. We do not want to be in business with everyone; we want to be in business with the best clients in the world. In our opinion, we are lucky enough to have found them.

Clients, if you want to discuss anything, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

 

Parrots and Canaries

© Can Stock Photo / bugphai

Once upon a time, canaries were used as a warning system for the buildup of toxic gases in coal mines. Death of the canary served as a warning to get out. These birds may be more popular now in the writings of market commentators than they ever were for mine safety.

A different bird might make a more useful metaphor. The Monty Python comedy troupe once performed a dialogue between a disgruntled customer and a pet shop owner. The customer was attempting to return a Norwegian Blue Parrot, which had apparently been dead when purchased.

The pet shop owner contends that the bird is resting, or stunned, or perhaps pining for the fjords. He attempts to distract the customer with praise for the bird’s beautiful plumage. The customer lets loose with an extensive string of euphemisms for death. “He has ceased to be! Bereft of life, kicked the bucket, shuffled off this mortal coil, run down the curtain, joined the choir invisible.”

The Norwegian blue may make a better analogy than the canary in the coal mine for financial markets.

Why? When the canary died, nobody debated it, or even suggested finishing out the shift down in the mine. But the death of the parrot was the subject of a long argument. That is what happens in the financial markets. For any product or security or market index you can find opinions on both sides at any time. BUY! SELL! BUY! SELL!

There are parts of the investment universe where certain commentary seems to us like someone saying “beautiful plumage” about a dead parrot. And, to be fair, there are other sectors which we believe are resting, or stunned, or perhaps pining for the fjords. Think of how a market optimist must have sounded in March of 2009 at the stock market bottom.

As contrarian investors, we typically hold some unpopular opinions. We believe profit potential lives where there are gaps between consensus perception and unfolding reality. So we do not really want everybody to agree with us—we cannot all be contrarians! We make no guarantees, but this is how we strive to do things here.

Clients, if you would like to talk about either “the canary in the coal mine” or “the parrot in the pet shop,” email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

 

Simply Effective: Avoiding Stampedes

© Can Stock Photo / dgphotography

“Avoiding stampedes” may be the simplest and most straightforward of our three fundamental principles of investing. Let’s talk about what it means.

In our view, a stampede in the markets has two features: large volumes of money changing hands, and irrational pricing. Information, evidence and indications about money flows are readily available. The assessment of pricing is necessarily more subjective.

At the time, many believe that prices make sense—or they would not be where they are. Technology and internet stocks in early 2000, homes in 2007, and commodities in 2011 all fit that pattern. At the peak, some true believers thought there was significant room for further increases. Only with the benefit of hindsight is it obvious that things were out of whack.

These examples are all about stampedes into a sector. Money also stampedes out of things at times, as we know. Stocks during the last financial crisis and high yield energy bonds near the bottom in oil prices in early 2016 are prime examples.

You may recognize a pattern. The habit of avoiding stampedes is a contrarian approach to investing—going against the crowd. If everybody else is doing it, we probably don’t want to.

In fact, if everybody else is doing one thing, we may seek to do the opposite.
Behavioral economics lends support to our practice, in our opinion. Much work in that field purports to show that most people do the wrong thing at the wrong time, thereby hurting their returns. Doing better than average would seem to require doing the opposite of what most people do.

(Of course, no method or system or theory is guaranteed to work, or even to perform the same in the future as it has in the past. And putting a theory into practice may be difficult to do.)

In practice, being a contrarian can be lonely. The crowd at the diner is unlikely to endorse doing what nobody else seems to be doing. We don’t care—we are striving to make investment returns, not please the crowd.

Clients, if you would like to talk about this or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.