“Contrarian” Investing

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“In an age of universal deceit, telling the truth is a revolutionary act.” – Famous quote misattributed to George Orwell. True attribution unknown.

A quick definition of Contrarian Investing is “an investment strategy that is characterized by purchasing and selling in contrast to the prevailing sentiment of the time”
( http://www.investopedia.com/terms/c/contrarian.asp )

Pretty simple. But more valuable than ever in a time where real news is labelled “fake”, and vice versa. A time where everyone around seems to be living in various bubbles. Echo chambers that feed into their confirmation biases. Willful ignorance. Information overload. Any number of reasons.

I get it. The world is a complicated and messy place, and investing properly means seeing connections between so many disparate pieces of information, much of which might be incorrect, or downright fabricated. The problem is further complicated by a secondary effect, which is the actions of other players (both human, and “headline scanning” high-frequency trade machines), acting upon their perception of reality.

The thing is though, when “everybody knows” something, it often turns out to be false. Especially in the investing world, even a definitive truth leads to distortion. If a stock, fund, or other asset is clearly incorrectly valued, and that fact becomes widely known, the buying or selling frenzy that ensues will revalue it grossly beyond where it makes any kind of rational sense.

I look for these things. It does require work. But it’s like anything. You don’t buy a big ticket item without doing research. Once you own it, you still need to pay attention to it, giving it proper care and maintenance. Car analogies abound.

The best investments, IMHO, are the ones you’ve been paying attention to for a long time, that suddenly enter the spotlight in a nonsensical way. They’re like finding a precious antique at a garage sale.

But this means you have to know something about antiques. Genuine interest must come first. Thankfully, there are so many different things to invest in, it stands to reason that there’s something for everyone. I’ve even encountered people who beat the odds consistently, by knowing about coffee. Coffee futures on commodity exchanges, stocks in large coffee retailers, etc. Go figure.

Me? Well, here’s what part of my desktop looks like:

measures

I have the same set of stats on my desktop at home and at work, and those are all updated once per minute. They tell me the price of Canadian crude oil (Western Canada Select), the currency exchange rate between the US and Canadian dollar, and both the North American spot price of gold, and how much a physical ounce costs to buy/sell in down town Vancouver.

Clearly I’m interested in precious metals, oil, and currency. It could just as easily be tech sector, real estate, or whatever. But I can’t help it. I know people who live and work in northern Alberta, and I love gold, ok? 😛

So I’ve been watching, and I noticed, especially towards the end of 2016, that across the board, precious metals mining stocks have been severely undervalued. I read news about them, look at their financial reports, and developed a growing sense of this. I figured that even by conservative estimates, the majority of the sector is at least 30% lower than it should be. These companies have real assets, real profits, and pay real dividends on stock, so it’s not like the “fantasy” investing that pervades the unicorn stocks in the tech sector, where companies are deemed to be worth billions because of “eyeballs”, or whatever.

That’s why my first investment, when I finally got a hold of a self-directed account for TFSA (Canadian Tax Free Savings Account) investing, was a precious metals miner fund. Exactly one month after my date of purchase, it was up 22.4%. Did I expect that? Not exactly. Is it volatile? Of course it is. I expect that at some point very soon, it’ll go down by a shocking amount. I think, though, that within the next year or two, I’ll see a point where it’s up 35%, and maybe I’ll sell, depending on the situation as I see it.

Another thing I’m looking at is the Euro. Based on a barrage of news, from everywhere, I see it crashing hard soon. It could be a year or two, or it might not be until 2020. I don’t day trade. I look at what could be deemed “intermediate term”, because my predictions always seem to have a general degree of accuracy over that time range. I don’t have a crystal ball to know what anything in the world will look like when I’m ready to retire, and I don’t know what crazy thing is going to happen within the next 48 hours.

I think the Euro is going to trend downward, and some day I’ll wake up and it’ll suddenly crash by a double digit percentage. So how do you bet against something? You short it. See this: http://www.investopedia.com/university/shortselling/

Of course, I’m nowhere near a sophisticated enough of an investor to do this on my own, but I’m looking at a couple managed funds that do this. This will probably be something I buy next.

General thoughts… Investing properly like this requires constant learning. You can’t be afraid of math, and you have to be interested in news about the things you’re looking to invest in. Thankfully, this learning has been an organic process for me. When I look at performance charts, I’ll see options to show things like Bollinger Bands. I had no idea what those were a few years ago, but as is often the case, Investopedia came to the rescue.
( http://www.investopedia.com/terms/b/bollingerbands.asp )
I remember enough highschool math to remind me about moving averages, and standard deviations, so I felt comfortable with what those additional lines on the graph tell me. As a general rule, if I can’t understand a metric, I don’t pay attention to it. I’ve only got my toes wet in the ocean of technical analysis. I leave the finer details that might matter to day traders and fund managers to those people.

Ok, this is turning into a bloody book (as usual). I’ll stop for today with a “to be continued”…