contrarian investing

Would You Take Every Drug on the Shelf?

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We have written quite a bit about the conventional investing wisdom recently. This essay puts the focus on what we do here at 228 Main.

One of our principles is to find the best bargains. We cannot be sure where they are, but we will still try to find them. We look for seemingly healthy investments at historically low-seeming valuations.

We recognize this means buying investments which are unpopular. This is fine with us. In fact, we rely on it. One of our core principles is to avoid stampedes. The more of something everyone else is buying, the more expensive it is going to get.

A natural consequence of our approach is that our portfolio construction may not be as diversified as conventional wisdom dictates. But we are not interested in trying to own everything. We want to own the bargains.

We may not always be able to pick them. We may miss out on some high flyers because we thought they were too expensive to buy. Sometimes a “bargain” turns out not to be one. Generally, though, we believe that our odds are better if we at least try to find the bargains.

An alternative to our way is like going to a doctor who prescribes every drug he can think of in case one of them works. “Chances are some of them will make things better and some of them will make things worse, but in theory one of them should cure you.” Wouldn’t you run out the door?

There are many unknowns in both medicine and investing. A doctor may have to try several courses of treatment before finding one that works. Similarly, we frequently implement several promising tactics at the same time. Some don’t work out and need to be replaced.

We think it is reckless, however, to simply give up trying to find successful investments in favor of simply grabbing a little bit of everything. Yet that seems to be a popular, if lazy, strategy with some investment professionals.

Clients, please call or email us if you want to discuss how our investment ideas apply to your situation.


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 possible loss of principal.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

No strategy assures success or protects against loss.

Bargain Hiding in Plain Sight

© Can Stock Photo / mrivserg

Imagine a product that has these uses1:
• Vital part of every home and building.
• Goes into every vehicle; hybrids and electrics use up to four times more.2
• Needed for manufacture, installation and use of solar panels and wind turbines.
• Key requirement in making batteries.

One might imagine that demand for this product will rise in coming years, as technology changes our power grid and transportation, and the world continues to modernize.

Now consider the supply side. It takes billions of dollars and four years or more to create a new production facility. The industry that produces it went through a depression as prices for the product got cut in half from 2011 to 20163. Revenues disappeared, losses mounted, spending got slashed. New projects were cancelled.

Rising demand, constricted supply: we know how this works. Prices will rise, revenues and earnings for producers will go up, stock prices may follow. No guarantees, of course, and the timing is always uncertain.

The product is COPPER. There is no replacement for it. The question we face as investors is, can we get involved on a favorable basis?

We know companies that produce a lot of copper, along with other resources. Their stocks are traded on the New York Stock Exchange. The valuation on their shares seems compelling. A dollar of profit in one trades for a third less than that of the average stock; the other one carries a two-thirds discount. One is trading at one-third of its all-time peak a few years back, the other is discounted even more.

Both stocks have been about twice as volatile as the average stock. (This is measured by a statistic called ‘beta.’) We don’t care. Downside volatility is wonderful if you are trying to buy bargains. But owners should be prepared for the roller-coaster.

Clients, we are telling you this story for a reason. When you hear that ‘the market is too high’ or things are at some unsustainable peak, remember that at 228 Main, we are pounding the table and jumping up and down about the bargains we are finding. If you would like to discuss this or anything else at greater length, please email us or call.

1The World Copper Factbook 2014, International Copper Study Group

2The Electric Vehicle Market and Copper Demand, International Copper Alliance

3Federal Reserve Bank of St. Louis


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.

Investing involves risk, including possible loss of principal.

The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

We Work Hard for the Money

© Can Stock Photo / lunamarina

Clients are familiar with our work in high yield corporate bonds. Since 2001, we have identified eight opportunities in the sector. We put more than $10 million to work by purchasing more than $20 million of bond face amounts at a discount, issued by these eight companies.

To be clear about the terminology, ‘high yield’ is a polite way to say ‘JUNK.’ Bonds do not sell for 70 cents or 30 cents on the dollar unless there are some issues that place the outcome in doubt. The conventional wisdom says that people should not purchase individual issues of junk bonds because of the risk involved.

This arena is a contrarian’s dream. We human beings know how to take things too far—it is one of the things we do best. To illustrate, when the price of oil fell from $140 to $100 to $60 to $30, the news was full of predictions that the price would fall to just $9 per barrel. Bonds issued by an oil exploration and production company fell to 30 cents on the dollar, then fell even more.

You already know we believe the crowd can be wrong, and the stampede is to be avoided. Our analysis of the company financial statements said that even if the oil company went broke, at $9 oil then bondholders would still probably recover 30 cents on the dollar in a liquidation. Since negative sentiment about oil prices had gone way too far, in our opinion, we concluded that oil was NOT going to $9 per barrel anyway.

Oil bottomed, the bonds bottomed, both rose. Clients, you noticed this in your 2016 statements. When we find an anomaly between what we expect will happen and what the market has priced in, profits may result.

What you do not see is the process by which we found the eight opportunities over sixteen years, and how we go about finding the next one. We recently found 199 high yield bonds offered for sale by 29 different issuing companies that met our first criteria. We seek 10% or higher yields, and 25% or greater discounts from face amount.

Smaller companies or issues of bonds that do not trade with sufficient liquidity are thrown out. Companies that lack an asset base from which creditors might gain a recovery are ruled out. And certain industries are judged too risky, based on the economic cycle.

The bottom line is, we need to understand how we would get our purchase money back even in the event of liquidation. If a bond issuing company ultimately cannot pay back the whole dollar, it goes broke. Creditors including bondholders get paid first, before stockholders. So if we buy in for 50 cents on the dollar and receive 75 cents back in a liquidation, we make money.

For each bond issuer, we need to understand the capital structure of the company. This tells us where the bonds rank in liquidation priority. We need to analyze the financial statements. What assets would be available for liquidation? Would the company make money if its debt was recalibrated to market value? We also must consider company management, and think about how well it would maneuver through a reorganization.

The title above says we work hard for the money. What we are talking about is the recent exercise where we looked at the 199 bonds of 29 issuers, went through our analysis to see if we could find a new opportunity…and came up empty. This is usually what happens.

We have looked at thousands of bonds issued by hundreds of companies over the years. Eight times in sixteen years, the stars lined up for us (and for you.) The search goes on, the next opportunity will pop up sooner or later. If you would like to talk about this or any other issue, 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.

High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Investing in mutual funds involves risk, including possible loss of principal.

Fishing Lures Are Made to Catch Fishermen

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Archeologists say the oldest known fishhooks date back 23,000 years. They have no idea when one person first sold another one a fishing lure. But ever since then, it has been a truth that fishing lures are designed to catch fishermen, not fish. A useful corollary is lurking just beneath the surface.

Recently the Wall Street Journal wrote about a narrow investment sector that was getting flooded with money by investors starved for yield. ‘Direct lending’ allows investors to take on the role of lending money to middle-size companies. The article made the point that the flood of money had reduced yields as well as the safety of the loans—perhaps investors should look elsewhere.

As if on cue, we immediately received an email about a direct lending strategy ‘formerly available only to institutional investors.’ It is said to be an innovative way to generate current income.

After years of near-zero interest rates and lingering fears about the stock market, who isn’t looking for an innovative way to generate income—particularly with a strategy formerly available only to institutions?

Clearly, investment products are designed to catch investors, not investment returns.

Behavioral economists have amply demonstrated how prone we humans are to make irrational decisions—to do the wrong thing at the wrong time. The bane of investing is the tendency to buy in euphoria near the peak and sell in panic near the low. The crowd seems to miss on the timing, time after time.

You know our principles include the idea of avoiding stampedes. We know that going against the crowd can be rewarding—our approach is contrarian. When something we are doing becomes popular, we need to think about doing something different. And if everybody else is buying some sector or product, we are likely to be suspicious of it.

Market history is full of products that attracted lots and lots of money, but little in the way of returns. It is much like sporting goods stores full of lures that catch fishermen, not fish. Clients, if you would like to talk about this or any other pertinent topic, 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.

Structured products typically have two components; a note and a derivative and a fixed maturity. They are complicated investments intended for a “buy and hold” strategy and offer protection from downside risk in exchange for forgoing some upside potential to achieve that protection. Principal protection may vary from partial to 100 percent.

Investing involves risk, including possible loss of principal.

A 10% Correction is Coming!

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There is an amazing thing about the performance of the stock market this year. Looking at the S&P 500 Stock Index, it has hardly dipped more than a few percent from its peaks. There has been a little wiggling, but far less than usual.

We human beings have a remarkable capacity to get used to current conditions, and expect them to persist. This could make trouble for us when the 10% market correction does eventually come around.

Long time clients know we believe that these market drops can neither be predicted nor traded profitably. Many of you call when the market does drop, seeking to invest in any bargains that appeared. We know how this works!

(Of course, we do not own ‘the market.’ Our holdings—and your account balances—sometimes deviate from the direction of the market. In 2016 we were fond of the difference. 2017 so far, the market is a little ahead of us. The point is, the market wiggles up and down, and our performance relative to the market also moves around.)

Commentator Morgan Housel recently wrote “every past market crash looks like an opportunity, but every future market crash looks like a risk.” Our experience after the 2007-2009 downturn demonstrated the first part of that statement. It is the next market crash that we must be concerned with.

Our research process is focused on finding bargains. We’ve taken steps in many portfolios to dampen volatility by changing holdings. Cash levels are generally higher, too. But none of these things will eliminate the temporary fluctuations that are an integral and necessary part of long term investing.

The market will decline. Our portfolios will decline. These declines will seem like a risk when we are going through them; we may see later that they really were an opportunity. The relative calm we’ve experience recently will give way to more volatile times—we know this, and should not be surprised by it.

We’re working to be in position to profit from opportunities that arise. Clients, if you would like to discuss your situation in greater detail, 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 indices are unmanaged and may not be invested into directly.

Investing involves risk, including possible loss of principal.

Investment Success and EQ

© Can Stock Photo / Mark2121

We write about productive investment attitudes and habits because we have seen first-hand their power to improve one’s position. Knowledge improves behavior, effective behavior increases account balances, growing balances raise our revenues. Everybody wins.

Behavioral economists have identified ways in which humans seem wired to make poor financial decisions based on emotions. We know from our work with you that this neither dooms our investment performance nor requires us to settle for mediocre results.

Communicating ideas and perspectives is therefore at the very heart of our enterprise. So we were excited to find the work of author Justin Bariso. He wrote the following concise wisdom about his field of expertise:

“Emotional intelligence is the ability to make emotions work for you, instead of against you.”

Some propose that emotional intelligence and its measurement, EQ, is more vital to success in business and life than one’s intelligence quotient, or IQ. This makes a great deal of sense to us, generally, although brains are wonderfully useful in our work, too.

We think Bariso’s statement has special meaning in the world of investing. Many people let emotions work against them; behavioral economics demonstrates this. Our approach, which explicitly seeks to avoid stampedes and embraces unpopular viewpoints, absolutely seeks to let emotions work for us. Emotions create anomalies in market prices, and that is where our opportunities live.

Legendary investor Warren Buffett once said, “Be greedy when others are fearful, and fearful when others are greedy.” Isn’t this just another way to say ‘make emotions work for you instead of against you?’

Clients, if you would like to talk about this or any other pertinent topic, 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.

Investing involves risk, including possible loss of principal.

What We Learned from You

© Can Stock Photo / ScantyNebula

One of the privileges of working with you is the opportunity to get to know your life stories. Over the decades, we’ve met a lot of people and heard many stories. We learned a lot about about productive financial habits and instincts from you, our clients.

We have noticed that people who are successful in retirement have some habits that helped them get there. These factors do not guarantee success, of course, but there seems to be a strong correlation. Here are three habits that seem to be key:

1. For all or most of their working careers, they invested regularly—every month, every payday. 401(k) plans, automatic deposits to Roth or other accounts…these put wealth-building on autopilot.

2. They spent less than they made. One client told us, it isn’t how much you make, it is how much you keep. We all know people who make good money and spend all of it–and others who manage to save on modest incomes.

3. They adapted to unexpected surprises without impairing their long term financial planning. Having an emergency fund, realizing that life has uncertainties…these are key to getting back on track through all kinds of times.

The three habits go a long way towards building financial security. In addition to those, some clients were apparently born with helpful investment instincts:

A. A native sense of confidence that the country works through its problems, that economic slowdowns give way to recovery sooner or later. Those who believe that seem to have an easier time waiting for markets to rebound.

B. An aversion to needing to do what everybody else is doing. Fads (or stampedes, as we call them) can be a dangerous way to invest.

We got done at the university a very long time ago. Thanks to you, however, we are always learning. One of the gratifying aspects of our work is the opportunity to pay it forward—to deliver the good news to the next generation. Clients, please email us or call if you would like to discuss this or any other topic.


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

The Tactical Bubble

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 Our long-time friends know that avoiding stampedes is one of our fundamental principles. We human beings know how to take things too far, history suggests. So we are always on the lookout for trends that may have become too popular.

A year or two ago, in the investment product market, “unconstrained bond managers” were all the rage. With interest rates near all-time low points and risk high, these magicians would own only the smart parts of the somewhat risky bond market. It turns out that all the money that poured into this idea would not fit into just the smart stuff.

We see a new trend today. Solicitations and information about investment concepts and products comes at us all day long, every day. Organizations would like us to send your money to them; human nature being what it is, they usually emphasize popular ideas, or ones that sound great. One term dominates these pitches nowadays.

You know we are contrarian—if everyone else likes something, we believe that alone is a reason to be cautious.

The trendy term is “tactical.” One of the dictionary definitions is “adroit in planning or maneuvering to accomplish a purpose.”

It is out of fashion to simply acknowledge (as we do) that the markets are volatile and fluctuate, an inherent feature that long term investors must face. The popular delusion is to pretend that a “tactical” manager can own stocks while they go up, then sell out to avoid the damage from the inevitable downturn.

It is a great story. Unfortunately, as a wise person noted a very long time ago, “They do not ring a bell at the top.” Is a 1% decline the first step of a 20% bear market? Or is it just the typical volatility that jerks the market around every week or month? No one ever knows.

The risk is that a small decline shakes the tactical investor out of the market, right before it turns around and makes new highs.

We have no issue in being ‘adroit in maneuvering.’ We think our work over the past couple of years shows that we are, hopefully, more adroit than ever. But it stretches credulity to believe that vast amounts of money can all be adroit at the same time.

Investors who have been fooled into believing that volatility can be sharply reduced or eliminated with no adverse effects on performance are likely to be disappointed. We are studying the potential impact if and when the “tactical” fad unwinds. Clients, if you would like to discuss this or any other matter, please email us or call.


Stock investing involves risk including loss of principal.

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.

Tactical allocation may involve more frequent buying and selling of assets and will tend to generate higher transaction cost. Investors should consider the tax consequences of moving positions more frequently.

Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.

When Dark Clouds Fill the Sky

© Can Stock Photo / pzAxe

Warren Buffett’s latest shareholder letter contained a remarkable paragraph:

“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.”

Long-time clients saw how this worked in the recovery from the 2009 crisis low point, and the post-9/11 lows in 2002. You are a remarkable group: when others panicked and sold out, many of you stayed the course. There is no guarantee, of course, that history will repeat, or that past performance indicates future outcomes.

Like great chess players, we need to be thinking many moves ahead. In our opinion, the economy in the US and around the globe is pretty good. We do not buy the whole stock market, we pick our spots. And we are excited about those spots.

But we do need to be steeled to both occasional market corrections of up to 10%, and the deeper declines that occur from time to time. They cannot be reliably predicted. What is in our control, however, is how we react. Do we sell out at low points, or get in position for a possible recovery? We are taking steps that may mitigate a general market decline—no guarantees, of course.

We are a little more prone to keep a little cash in reserve, to diversify into lower-priced markets, to continue to prune holdings that may be extended and add names we believe to be bargains. Most of our holdings are not sitting at all-time highs, although overall market averages are–the S&P 500 for example reached a new high as recently as March 1st1. You can read about our current themes here.

In the very best case, markets and our account values fluctuate. This is the tradeoff we accept in order to seek the returns we need to pursue our goals.

We have a great partnership with you, our amazing group of clients. You understand living with volatility can lead to long term rewards. We think we know what to do, whether the skies are blue or the dark clouds have gathered. If you have questions or comments, please write or call.

1Market data from Standard & Poor’s


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.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Fear and Greed

© Can Stock Photo / Andreus

Two of the primary emotions affecting the stock market, it is said, are fear and greed.

Facts and figures are prominent in our work of assessing and ranking various investment opportunities. But in the day to day action of any market, buyers and sellers and their motivations have an oversize impact.

In our view, fear has dominated most of the last eight years in the US stock market. Many investors sold out after the double drubbings beginning in 2000 and in 2007. Money flows from retail investors, reflecting withdrawals from the market in most recent years, seem to confirm it.

Anecdotally, we also noticed burgeoning interest in strategies that hoped to avoid exposure to the stock market yet still make money. Commodities, derivatives, factor investing, bonds at low interest rates and other fads drew in a lot of money. This, we believe, reflected fear of the stock market.

For much of the market rise since 2009, it was said to be ‘the most hated rally in history’ because so many people missed out.

Knowing Warren Buffett’s famous dictum, “Be greedy when others are fearful, and fearful when others are greedy,” we stayed the course through the downturn. None of us hated this rally, did we?

Now the market sits at all-time highs. This probably makes sense when earnings are high and rising, and interest rates remain fairly low. But we are on the lookout for signs that greed has become the dominant force in the market. When others become greedy, perhaps we need to become fearful.

We are also doing other things, as well. You may have noticed winning positions getting trimmed back, and potential new bargains (we hope!) being added to portfolios. Owning bargains is no guarantee against loss, but we believe it helps. We are also nibbling at other markets in other lands, ones that have lagged and may be at low levels.

Our new portfolio design, accommodating layers of cash and more moderate investments as well as our traditional research-driven core layer, is another way to attempt to mitigate future downside.

The markets go up and down. We cannot build wealth over the long haul without facing that, and living with it. If you would like to talk about your portfolio or situation in detail, 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.

Stock investing involves risk including loss of principal.

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.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.