Contrarian Investing

[winston]

TOL:-

And just two days ago, the "experts" on CNBC were screaming Y2K ! Y2K !

And if the Fiscal Cliff is not renewed, it would be the end of the world.

As if the 2% drop in US GDP over a period of 2 years can stop the world from spinning...

[winston]

Invest in the Dogs of the World by Carl Delfeld

At this time of the year, you can count on gurus and pundits to deliver an avalanche of two types of articles.

The first is predictions for 2013 that, I’ll admit, have a chance of becoming true.

The second is lists of what markets performed best during the previous year, suggesting that you better jump on the bandwagon or you’ll miss the boat.

And if you follow this strategy, the following exchange-traded funds (ETFs) would be on your buy list:
• The Dow Jones U.S. Home Construction Index (NYSE: ITB), up 80%.
• The usual grouping of emerging markets that produced eye-popping returns. This year it was the iShares MSCI Turkey Index (NYSE: TUR), up 61.8%, the EG Shares India Consumer (NYSE: INCO), up 55%, the iShares MSCI Philippines Investable (NYSE: EPHE), up 48%, and the iShares MSCI Poland Investable (NYSE: EPOL), up 39%.
• The Market Vectors Biotech (NYSE: BBH), which jumped up 51%.

Now, some of these ETFs may continue to surge in early 2013. But chances are greater that they’ll level off, or even pull back.

Having an independent streak as deep as the Grand Canyon, I suggest you take a different tact…

Look for the Laggards

For country-specific funds, look at the iShares MSCI Brazil Index (EWZ), down 1.3%, and the Market Vectors Russia Small-Cap (NYSE: RSXJ), down 6%.

And while gold investors have done okay this year, gold explorers and miners have been in a big funk. Rising production and operating costs have driven the Gold Explorers ETF (NYSE: GLDX) down 37%.

The gap between gold prices and gold mining shares is at an all-time high, and will likely narrow. You could do even better (albeit with greater risk) by investing in individual gold mining stocks that have the lowest production and operating costs.

But coffee may be an even better bet than gold miners. Due largely to a bumper coffee crop in Brazil, the Dow Jones-UBS Coffee ETN (NYSE: JO) was down 43% in 2012. What the weather will be like in Brazil in 2013 is beyond me, but I do know that demand for coffee is steadily rising throughout the world.

My own coffee habit goes back to my student days in Japan. Imagine my surprise when I found more coffee shops per block in Tokyo than bars in my hometown of Milwaukee.

I had thought Japan, like much of Asia, was a land of tea drinkers. Turns out, with westernization and rising incomes, the Japanese came to love coffee – provided it was laden with milk and sugar.

Today, Japan’s per capita coffee consumption is 75% of America’s, and still trending upwards. From 1980 to 1995, coffee consumption in Japan was up 300%, in South Korea a stunning 1,800%… And Taiwan’s coffee consumption has quadrupled over just the past four years.

Then there’s China, a country at a very early stage of this promising growth trajectory.

The upside potential for an explosion of demand can be summed up with one fact: My three cups of coffee a day is more than the average Chinese person drinks in a year!

So, my advice for those with an independent streak is: Take some winnings off the table, and add a dash of coffee and gold miners to your portfolio.

Source: Investment U

[winston]

TOL:-

Everyone that I know seemed to be a "Contrarian Investor".

Does not mean that it's time to be a "Momentum Investor" ?

[winston]

Two Timely Contrarian Trades By Louis Basenese

http://www.yolohub.com/trading/two-time ... ian-trades

[winston]

Three Rules Every Successful Investor Should Learn

By Louis Basenese


Source: Wall Street Daily

http://www.thetradingreport.com/2013/06 ... uld-learn/

[winston]

TOL:-

Had coffeee with two supposedly smart analysts today.

When I asked them what the risks out there now are, they gave me the usual spin about fund flows from EM, tapering, rising interest rates etc.

When I asked them what the strategy now should be, they mentioned preservation of capital.

Recently, when I checked with my friends and remisier, they also mentioned preservation of capital, citing that it's now summer and the traders are away and it's always weak before November etc.

I think it's probably time to be buying on the dips ...

[winston]

Two Great Contrarian Plays for Long-Term Investors

by Alexander Green

Source: Investment U

http://www.investmentu.com/article/deta ... _pux6PlKZQ

[winston]

IT PAYS TO BE CONTRARIAN

Almost nobody expected it... but one of the best-performing assets this year has been U.S. Treasury bonds.

As you'll remember, there was no "surer" bet in all of finance: Interest rates had to go up in 2014. And since interest rates and bond prices have an inverse relationship (when rates go up, bond prices go down – and vice versa), that meant bond prices were "sure" to slump in 2014.

But as regular readers know, when the crowd all agrees on something, it's likely that the opposite will happen. And that's exactly what we've seen with U.S. Treasurys this year.

As Brett Eversole pointed out last October in Growth Stock Wire, sentiment on U.S. Treasurys had reached a negative extreme – a bullish sign for Treasurys. As Brett explained, it was a great time to place a contrarian bet.

You can see how this idea has played out in the chart below. It shows the price action for the iShares U.S. Treasury Bond Fund (TLT). TLT is the easiest way to gain exposure to long-term U.S. Treasurys.

And as you can see, Brett's call was spot on... interest rates have fallen and TLT shares have soared close to 20% since the start of the year. It's one more example of why it pays to go against the crowd.

Source: Daily Wealth

[winston]

The Headline All Great Traders Hunt For By Brian Hunt

"Buy when there is blood in the streets." – Nathan Rothschild

Back in his day, Nathan Rothschild was like Warren Buffett and Alan Greenspan rolled into one.

Nathan was one of the founding members of the greatest banking dynasty in history. He and his family bankrolled wars, giant gold purchases, governments, and anything else that could pay them interest. Even kings couldn't match Nathan's power and influence. He's considered the man who financed Napoleon's final defeat at Waterloo in 1815.

Today, many estimate the Rothschild fortune totals billions or even trillions. (The family has always managed their accounts the right way: So nobody knows how large they are.)

Despite the enormous wealth he accumulated, Nathan is best known by the classic contrarian investment quote above.

"Blood in the streets" has become a cliché, but for good reason: To make extraordinary gains, you must buy an asset near the point of maximum pessimism.

In Nathan's day, in 19th century Europe, folks had plenty of chances to buy when blood literally soaked city streets and battlefields. The developing nations fought hideous wars at least once a generation. In today's age of relative peace, however, it's tougher to follow Nathan's lead.

I can't tell you to hop on a plane and scout rental properties or stock investments in a war zone. So here's the main thing to take away from "blood in the streets"… Great investors and traders are like bird dogs for news of disaster and despondency. They don't wince at headlines like "Gambling industry bankrupt," or "Indian stock market crashes for seventh day in a row." They get excited.

They know desperate situations create incredible values and incredible extremes in sentiment. They are always on the hunt for places where "things can't get any worse"… When things "can't get any worse," they can only get better.

It's only when things can't get any worse that you can buy world-class businesses for just four or five times annual profits… or safe bonds yielding 18%… or trophy properties for 80% below their highs. And despite what your emotions tell you, dark and gloomy situations have a way of working themselves out.

Note that in March 2009, most folks believed the Great Depression II was in the cards. There was plenty of blood on the balance sheets of bankrupt businesses and homeowners. The average stock climbed 60% in six months after the pessimism blew over. Many stocks climbed 200% and 300%.

So turn your completely normal, knee-jerk reaction to good news on its head. Don't rush out to buy a stock, a piece of land, or a commodity based on some bullish headline like "Analysts all agree… crude oil is going higher." Instead, hunt for headlines like, "Uranium prices sink to historic low… industry desperate for money," or "Argentina suffers currency crisis." Both of these headlines preceded huge gains in the past decade.

Like many great trading ideas, Nathan's quote has been "repeated" by other skilled investors: Warren Buffett tells us, "Be greedy when others are fearful and fearful when others are greedy." Steve Sjuggerud says, "You make triple-digit gains not when things go from bad to good, but when things go from bad to less bad."

However it's phrased, the idea behind "blood in the streets" is the same: Be on the lookout for desperate, blown-out sectors, commodities, and countries. This is where you'll find extraordinary deals. It has been the surest way to triple-digit profits for hundreds of years.

It will be the surest way for hundreds more.

Source: Growth Stock Wire

[winston]

How to Be a "Connoisseur of Extremes"


Stansberry Research: You've mentioned in the past that to enjoy a lifetime of trading success, you've got to be able to spot "extremes" in the market… that you must become a "connoisseur of extremes."

What do you mean by that?

Brian Hunt: By saying you should become a "connoisseur of extremes," I'm saying you should always be searching for situations where a market is in a drastically different state than normal.

By locating these extreme states – and then betting on conditions returning in the direction of normal – you can consistently make low-risk profits in any type of market.

It's important to realize that extremes can occur in any market – from stocks to commodities to real estate to bonds to currencies.

Extremes can be fundamental in nature… like how cheap or how expensive a stock market is. Another name for this is a "valuation" extreme. Extremes can also be price-action based… like how overbought or oversold a market is. That's a "technical" extreme. And extremes can show up in sentiment readings, like surveys that monitor investor pessimism and optimism.


SR: Let's cover valuation extremes…

Hunt: Sure. A good example of a fundamental valuation extreme came in U.S. stocks in 1982. Back then, stocks became extremely cheap relative to their earnings power.

For U.S. stocks, the normal price-to-earnings multiple over the past hundred years or so is 16. In 1982, the economy and the stock market had been doing so poorly for so long that people simply gave up on stocks. Since nobody wanted to own stocks, they became extremely cheap. The price-to-earnings multiple fell to around 8.

It was one of the greatest times ever to buy U.S. stocks. The market rose 50% in just one year. It doubled by 1986. It rose more than 10-fold over the next 17 years.

Fast-forward about two decades and you find the opposite extreme. In 1999, optimism toward stocks was so high that the market reached a price-to-earnings ratio of 33. This was a ridiculous, extreme level of overvaluation.

Remember, the normal price-to-earnings ratio of the past 100 years is around 16. The extreme level of overvaluation made it a terrible time to buy stocks. The market crashed for several years after hitting that extreme.

When it comes to fundamentals, you need to study an asset's historical valuation and find out what's normal for that asset. When an asset gets very cheap relative to its historical valuation, you need to consider buying. When an asset gets extremely expensive relative to its historical valuation, you want to consider avoiding it… or even betting on it falling.

This goes for oil stocks, tech stocks, real estate, and lots of other assets.


SR: OK… so people need to buy stocks when they get extremely cheap relative to their historical norm, and avoid them when they get extremely expensive relative to their historical norm. How about extremes that are "technical" in nature?

Hunt: Before we get into particulars, let's define the term to prevent confusion.

Technical analysis is the study of price action and trading volume. Many people think technical analysis is all about predicting the market, but it's not. It simply comes down to using price and volume data to gauge market action… and to help guide decisions. That's it.

There are dozens of technical indicators that measure a stock's oversold/overbought levels. One I've found useful is the "RSI," which stands for "relative strength index." The RSI is nothing magical or predictive. It's simply an objective way to gauge the overbought/oversold nature of a stock.

My colleague Jeff Clark is amazing at finding short-term technical extremes in the market. He uses an indicator called the "bullish percent index" to identify overbought/oversold extremes in broad market sectors. I'm sure Jeff will tell you there's nothing magical or predictive about the bullish percent index. Again, it's simply an objective way to gauge price action.

We are using these gauges to identify extremes in the market… then betting on the conditions being "relieved" in the other direction. When the pressure behind an extreme is released, the market tends to snap back like a rubber band stretched to its limit.

There are literally hundreds of technical indicators and chart patterns people use. While I have a handful of things that I know work, what works for me or you or someone else isn't as important as knowing the overarching goal: That you're using this stuff to spot extremes and trade them.

For example, I often trade short-term moves in blue-chip stocks, like Coke and McDonald's. These are elite businesses with tremendous competitive advantages and long histories of treating shareholders well.

But like any business, even stable blue chips go through rough patches. If they report a weak quarter or have a product recall, or any other of a dozen solvable problems, the market tends to overreact and sell the shares. The stock price will reach a state we can term "oversold." This is a condition where the stock has reached an extreme level of poor short-term price action.

It's around this time that I'll step in and trade the stock from the long side. World-class businesses have a way of rebounding from short-term setbacks. They tend to snap back from extremely oversold levels.


SR: OK, when it comes to technical analysis, we're looking for extreme conditions that, when relieved, produce "snap back" moves.

You mentioned extremes in sentiment. Let's cover that idea…

Hunt: Let's also define this term to prevent confusion. The study of market sentiment comes down to gauging the amount of pessimism or optimism toward a given asset. You can gauge the sentiment for just about any kind of asset… be it stocks, commodities, real estate or currencies.

Gauging market sentiment is more art than science. There are lots of ways to gauge sentiment that cannot precisely be measured… and some that can.

Whatever gauges you use, the goal is the same: to find extreme levels of pessimism or optimism. You want to find situations where the majority of market participants are extremely bullish or bearish… and then bet against them. You want to go against the crowd.

When most folks can't stand the thought of owning a particular kind of investment, chances are good that it's cheap… and that it's due for at least a short-term rebound.

On the other hand, when everyone loves an asset – like when everyone loved stocks in 1999 – chances are good that the asset is expensive and due for at least a short-term drop.

A few informal sentiment gauges – the kind that can't be precisely measured – are magazine covers and cocktail party chatter.

If a mainstream publication like Newsweek or Time has an asset on its cover, chances are good that the asset is far too popular, far too expensive, and due for at least a short-term drop.

Magazine publishers have to write stories lots of people want to read. Plus, it's mostly journalists – not great investors – who write those stories. Mainstream magazines are just going to write about what's popular so they can sell lots of magazines. Back in 1999 and 2000, they always had stocks on their covers. It was a danger sign. In 2006, it was all about how to cash in on the real estate boom. That was a danger sign.

The idea behind studying cocktail party chatter is similar. It's another way to get a feel for what the general public thinks about a given investment.

You can get a feel for this by talking to people at cocktail parties, family gatherings, holiday parties, and dinner parties. When lots of people are excited about a given asset and are buying as much as they can, it's a major warning sign. It's a sign the asset is too popular, too expensive, and due for a fall.

On the other hand, when most folks can't stand the thought of owning a given asset, chances are good that it's a good buy.

For example, back in 2003, I put a large portion of my net worth in gold. When I'd tell people that I owned a lot of gold, they'd look at me like I was crazy. You could say there was an extreme amount of disinterest in gold. Gold went on to rise many hundreds of percent.


SR: What are some sentiment indicators that can be measured precisely?

Hunt: Money managers and investment newsletter writers are always being surveyed and monitored.

Just like most regular investors, the supposed professional investors get swept up in crowd-following behavior. You want to bet against extremes here as well.

SR: It sounds like being a "connoisseur of extremes" is all about finding abnormal situations, and then betting on them becoming normal again.

Hunt: Exactly. It's important to note that being a "connoisseur of extremes" – and trading them – is about getting a powerful force of nature to work in your favor. That force is called "reversion to the mean."

"Reversion to the mean" is a broad term that is used to describe the tendency for things in extreme, or abnormal, states to return to more normal states. You see "reversion to the mean" all the time. You see it in academics, business, trading, and dozens of other areas.

For example, winning an NFL Super Bowl requires an extreme set of circumstances. A football team has to have a great coach… a great set of players… and they have to play extremely well for an extended period of time. Its elite players have to avoid injury. It has to beat a series of excellent teams at the end of the season.

It's really hard to get all the stars aligned and pull off of a Super Bowl-winning season. That's why Super Bowl winners tend not to win the championship the next year. They tend to "revert to the mean" and not win it.

To go back to the example of trading extremely oversold blue-chip stocks, if a blue-chip stock like Coca-Cola is sold heavily day after day for several weeks, chances are good that its trading action will "revert to the mean" and cease being so extreme. Chances are good that it will stop falling and start rising.


SR: Understood. Any final thoughts?

Hunt: One last thing that I think is important to note is that an extreme in valuation is often accompanied by extreme technical and sentiment readings.

That's why I believe studying and trading the market with "just" fundamentals or "just" technicals can be a limiting mindset. Consider what happened with offshore drilling stocks in mid-2010, just after the terrible Gulf of Mexico oil-well disaster.

After the disaster, investors dumped shares of offshore drilling stocks. They completely overreacted. It was like people believed we'd never be drilling for oil again. Sentiment toward the sector was terrible. Even companies with little business exposure to the Gulf of Mexico fell more than 30%.

This big decline left the whole sector in an extremely oversold state. It also made the stocks very cheap. Great drilling businesses were sold down to valuations of around five times earnings.

After the selloff, you had a sector that was extremely unpopular, extremely cheap, and extremely oversold from a technical standpoint. So, I went long offshore drilling stocks and made big returns in a short amount of time.

The stocks enjoyed a sharp "snapback" rally. Again, this rally was preceded by "extreme" valuation, technical, and sentiment readings.

SR: That's why it pays to look for extremes of all types.

Hunt: Yes, exactly.

Source: Growth Stock Wire