contrarian investing

Let’s Talk It Out!

Converse, communicate, babble, blather, rant, rave… I love to talk! Preaching to the choir, but it’s worth reminding everyone: I’m here to do this. By choice. More in this aptly-titled video.


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If All Your Friends Did It…

It sounds great in an action movie: “This is no time to panic!” But… is it ever a good time to panic? Sounds like a lot of work, anyway. 😊


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A Birthday Approaches

photo shows a carousel with a city in the background

My birthday is approaching, and I’m ruminating about the meaning of another year in the life—but you already know how much I like to take a step back, get the big picture, and imagine the long view.

22, 44, 66—or, my life in thirds.

I’m thinking about my life in thirds: 22 years of getting ready, 22 years of gaining experience, and 22 years building this lovely enterprise at 228 Main. That’s right, I’m turning 66, wondering what the next 22 years will bring.

It feels like the years ahead will be about growing the team that runs the firm, building capabilities and capacity, putting the next generation in position to do better work than ever for you—and for the coming generations, too.

While we work to refine our methods and strategies and tactics, we’ll honor the same principles we always have, and we’ll live by the same values: the better off you are, the better off we will likely be. So the center of our work will always be about striving to grow your buckets, to focus on your outcomes.

I’m down to my last 26 years now… Mark your calendars for the retirement party: May 27, 2048!

I appreciate you for being with me on this journey thus far. Thank you. I would not trade my spot with any of the other 7 billion of us, it’s been so good.

Stop in and see us, anytime.


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Market Outlook 2022

photo shows hands around a glowing crystal ball

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, don’t really say much.

But our prediction is quite specific.

For those who have visited our offices, you 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% accurate. So perhaps the question should be, “If you knew which way the stock market was going to go 74% of the time, could you make money investing?”

Without further ado, here is what our 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, this prediction has been right 74% of the time.

We can’t know how well the track record will hold up, but we believe this presents a favorable backdrop against which to buy bargains, to avoid stampedes in the markets, and to seek to own the orchard for the fruit crop. In other words, to keep on keeping on, following our principles and plans and strategies. And remember the long haul sets its sights beyond the coming year.

It is tempting here to include a discussion of the economy, the strengths and weaknesses we perceive at this moment. We’ll leave that to people with more time on their hands.

But if your plans are evolving and deserve some attention in the new year, please email us or call.

Cheers to 2022, friends.


This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes.

Investing involves risks including possible loss of principal. All performance referenced is historical and is no guarantee of future results.

Any economic forecasts set forth may not develop as predicted and are subject to change.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

All indices are unmanaged and cannot be invested into directly.


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That Ain’t Attrition!

Money you accumulate can work like an orchard, and the income—the fruit crop—helps run retirement life. Some in the industry would call clients taking out their own money “attrition.” Attrition, per the dictionary: “loss or destruction, corrosion, waste.” But to us, it’s simply investing wisely, spending well. Attrition, shmattrition.


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IT WORKS UNTIL IT DOESN’T

the photo shows a wooden desk with a keyboard, notepad, pen, and balled up pieces of paper

We’re contrarians. We are not satisfied with conventional thinking that portfolio management requires plugging in the right numbers and then following the formula.

It’s not that simple—and it can actually lead investors astray.

Here’s the deal. Modern portfolio theory—one version of the conventional wisdom—uses rigorous statistical models that attempt to quantify volatility and risk in their many forms. The idea is that if you can measure and predict volatility then you can construct a portfolio that has only as much volatility as you desire.

We believe there are a lot of problems with this approach. These models all rely on the assumption that the market will continue to behave rationally. So when the market experiences irrational exuberance, statistical models quickly lose their meaning and begin producing nonsense.

For example, one measure of a stock’s volatility is called its “beta.” The more correlated a stock’s movement is to the broader market, the higher the beta. A high beta stock tends to be a big winner or big loser based on what the market is doing, while a low beta stock generally moves less than the market. A stock can even have a negative beta, where it tends to move the opposite way from the rest of the market!

Under normal circumstances, volatile stocks tend to have a high beta. But when a hot stock gets caught up in a speculative bubble, it can take on a life of its own. A stock on a hot streak that goes up even on days when the market is down will show a lower beta than stocks that follow the market but may still be volatile.

In cases like this, investment managers that are chasing “low beta” may end up with some very volatile holdings in a portfolio that claims to prioritize stability and low market correlation. And investors that are looking to avoid the roller coaster of the stock market may find themselves on an even bigger ride without realizing it.

We believe statistical analysis can be useful, but it cannot compete with timeless investment principles. Trying to quantify volatility exposure can lead to ugly surprises when the underlying models break down.

We think there’s another way. Instead of trying to mathematically capture and avoid it, we believe in living with volatility. If you are investing for the long haul and you know where your cash flow is coming from, you do not need to fret about day-to-day price action.

Clients, if you have questions about this or anything else, please give us a call.


Content in this material is for general information only and 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.

Schrödinger’s Market

canstockphoto20919748

Quantum physicist Erwin Schrödinger once came up with a thought experiment to illustrate a difficult conceptual problem. Suppose you have an opaque box with a cat inside. In the box is a mechanism that is designed to release a poison gas based on the random actions of subatomic particles on a quantum level.

Now according to quantum theory, it is literally impossible to know what these particles will do in advance. You cannot even accurately measure what they are currently doing beyond general probabilities. In fact, until you observe them they act as though they are doing multiple mutually exclusive things—including behaving as though they are two places at once!

Hence Schrödinger’s box. Without observing the contents of the box you have no way of knowing if quantum action triggered the poison or not. Thus, until you open the box and look the cat is simultaneously alive and dead: a surprising conclusion, and a difficult paradox for physicists!

You and I can leave that problem to the scientists, but Schrödinger’s box can be a useful metaphor for other unknowable states. The actions of financial markets are theoretically not as complicated as quantum mechanics. But predicting market action is so far beyond our current mathematical understanding that they might as well be.

Like quantum particles, the value of a market cannot accurately be measured without interacting with it. This leads to a great deal of uncertainty and can sometimes make it feel like multiple conflicting realities are true at once.

Reading the financial press you will often be presented with competing headlines declaring that we are simultaneously in the midst of a great bull market and a terrible bear market.

As with the box, we prefer to leave these paradoxes to people with more time on their hands. Instead of trying to time the market, we believe in sticking to timeless principles like avoiding stampedes and finding bargains in the hopes of finding quality companies. We cannot predict what market prices will do from moment to moment, but we can guess at general probabilities.

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

Two Economists

© Can Stock Photo / skaron

The story goes like this. Two economists are walking down the street. One says, “Look! A $20 bill, just lying there!” and reaches to pick it up. The other says, “You fool! If that was really a $20 bill, somebody would have picked it up already.”

The underpinnings of this joke might be what is called the Efficient Markets Hypothesis, or EMH. It holds that all available information is already in the price of every security, so it is not possible to ‘beat the market.’ Related notions include the idea that investment selection does not matter, only the asset class or investment allocation.

Of course, our experience tells us that at times, certain investments do get mispriced. Condos in Las Vegas in 2007, tech stocks during the dot-com era, oil at $140 per barrel in 2008: all of these things seem to be examples of when the market was not efficient at all.

At these times, consensus expectations drifted far from the unfolding reality. “You can’t lose money in real estate” and “We’re in a new era, tech stock valuations don’t matter” and “Oil will never trade below $100 again” were the refrains of those faulty expectations. You may remember them.

Of course, we believe that the crowd can be wrong. That space between consensus expectations and the unfolding reality is where profit potential lives. One of our jobs is to try to find those exploitable anomalies and invest in them. Another is to go against the crowd when we believe it is wrong.

The simple rule, ‘never join a stampede in the markets,’ is one way we express this.

As a consequence, looking at the world with our own eyes, doing our own research, finding our own conclusions, this is what we do at 228 Main. It takes some courage to go against the crowd, to take unpopular actions, to stick with our strategies even when they require more patience than we had planned on. You and we are in this together: without your persistence, we could not do what we do over the long haul.

Hopefully from time to time we will find those $20 bills that others do not believe in.

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


Content in this material is for general information only and 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.

More Lessons from Moneyball

© Can Stock Photo / findog822

Michael Lewis’s book Moneyball turned 16 over the summer. In 2015, we wrote about the contrarian lessons we noticed in the Moneyball movement. The Oakland A’s won by using data to make roster decisions, favoring things like on-base percentage over batting average. Then, after the rest of the league adopted the A’s process, the 2015 World Series champion Royals won by bucking the trend and not following along.

We’ve found another lesson within Moneyball that applies to us—and you. Oakland A’s general manager Billy Beane rarely watched the product he helped put on the field to see how it performed. This may seem unusual (who wouldn’t want to watch baseball as part of their job?), but Beane had his reasons.

In a 2014 interview for the Men in Blazers podcast, Beane explained that he didn’t watch games because he did not want to do something about it in the heat of the moment. “When I watch a game, I get a visceral reaction to something that happens—which is probably not a good idea when you’re the boss, when you can actually pick up the phone and do something.”

Beane continued by saying doing something “probably isn’t logical and rational based on some temporary experience you just felt in a game.” This has meaning to us.

We all know that the market goes up and down, and we don’t find watching the ticker each second of the day to be helpful. Like Beane, we’ve strategically built our portfolios for performance over the long term (no guarantees), and we’re willing to ignore a hiccup from a star on occasion.

Like Beane, we can remove ourselves and our initial emotions from the equation. Then we can focus on only the moves to better our “team” and its goals in the big picture.

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


Content in this material is for general information only and 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.

The Anti-Buffett

© Can Stock Photo / Leaf

We had back-to-back conversations recently with clients who are big fans of Warren Buffett. Oddly, they seem to dislike the application of his principles to their portfolios. It is a good illustration of why Buffett’s success has endured, in our opinion. His ideas are easy to understand, hard to do.

Consider these quotations, investor first, then Buffett in bold.

“This stock has done nothing but go down since I bought it. I want to sell.”
I love it when stocks I like go down, then I can buy more at a better price.

“That company is in the news all the time with problems. I don’t think we should buy it.”
The troubles everyone knows about are already in the stock price.

“Everyone I know is afraid of this market, so I’m thinking of getting out.”
Be greedy when others are fearful.

“This stock is doing great, it’s gone up a lot since we bought it.”
Watch the company, not the stock.

These conversations are noteworthy because they are rare. The tagline on our digital archives, ‘for the best clients in the whole world,’ reflects our high esteem for you.

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


Content in this material is for general information only and 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.