Being A Contrarian

I consider myself a contrarian investor.  I wait for stocks to get beat up, when all the news is dark and buy at precisely that time.  News tends to be overblown, creating major discounts in companies that can easy overcome these temporary, short-term issues.  However, my contrarian investing is usually limited to individual companies.  I do not make many predictions on the general market as a whole.

James A. Kostohryz, a fellow author on Seeking Alpha, is one of the biggest contrarians I know of.  He rarely mentions single stocks.  Instead he seeks to benefit from overinflated or oversold markets, either buy going through bonds or shorting the indices themselves.  He recently wrote an article on his bearish outlook on second quarter earnings that is worth a read.  I do not take his words as absolute truth and I disagree with him many times.  However, it is important to look at both sides of the situation.  If you are afraid to look at the other side it means you are weak on your current convictions.

Market Up Huge Day After Obamacare Decision / Look At Alcohol Stocks

The dow is up over 200 points on good news from Europe.  The shorters from yesterday based on the negative effects of Obamacare on the country are covering, taking a big loss.  This further illustrates the futility of letting the news influence your investing.

Alcoholic beverage stocks, BUD and STZ skyrocketed today based on acquisitions they will be making.  These stocks have outperformed the market over the last couple of years. A lot of people like myself missed them because we did not view them as the consumer staples that they are.  Alcohol consumption is a staple worldwide, as much if not more than cigarettes.  I do not foresee any decline in this trend as “sophisticated” wine tasters (also known as alcoholics) increase in numbers daily, and the health beneifts of a serving of alcohol daily reduces heart disease by 30%.  These companies should be viewed with similar attitude as any food producer, albiet with some more volatility that, for reasons unknown to me, affect the companies.

China Gerui Adv Mtals Grp Ltd (CHOP)

My friend has been harassing me every day for weeks now about a specialized Chinese steel company.  He says they have a stranglehold on the specialized market and they are experiencing tremendous earnings growth.  Yet, the stock has dropped heavily over the last couple of years, but has recently experienced some significant price movement towards the upside.

I looked at the 10-K and it had one of the largest risk sections I have ever seen.  Cyclical steel demand, Chinese regulation, negative sentiment towards Chinese companies and on and on.  I have tried telling him that this stock is not even in my universe of investing.  It doesn’t exist to me as far as I am concerned.  It is gambling.

That being said he kept bugging me about advice so I decided to give him what I thought was an objective opinion: the company is highly volatile with extreme risks, but if the company can navigate through its tight rope without falling off it might pay off significantly.  I will never buy this stock and if it goes to 100 I will not lose any sleep over it.  Like I said earlier, some stocks are simply not visible to me.  These include low liquid, foreign, cyclical companies.  I do not let them occupy my mind.

Stay Away From PBR

PBR may look tempting due to its significant decline, but it should probably be lower than it is.  Today the stock is down over 6%.  The company was forced to raise gasoline prices in order to raise revenue, while at the same time reducing oil output estimates.  For people looking to gamble this may be an interesting candidate, but for most investors it is dangerous.  Better to let things pan out and consider picking it up later, although Brazilian oil is a very difficult market to understand.  I would stay away and look for more stable companies like Exxon of Chevron.

Negative Criticism Is The Most Helpful

I wrote an article last week that generated over 100 comments.  The first comment was a scathing criticism of my ideas, presented rudely I might add.  At first I was disappointed seeing this as my top comment, but was so proud when post after post came to my defense.  This spawned a lively debate about the pros and cons of averaging down where I picked up a lot of great ideas from the contributors.  Now I look forward to the criticism and the debate that spawns from it.

Orcale Up 5% Pre Market

Oracles skyrocketed this morning on anticipation of good earnings results coming June 21st.  I intended to buy Oracle around $25 but it seems to have gotten away from me in the short term.  It is a solid company with tons of cash.  All of the fundamentals are there.  I am not going to start chasing the stock though as it trades almost like a commodity and tends to swing a lot.  Looking back I am left wondering if I set my orders too low, but the 20/20 hindsight is probably influencing my opinion.  I’d much rather miss out on an opportunity than take a loss.

Greek Gamblers

Both puts and calls are down on the SPY today along with the implied volatility.  OOTM put and call buyers and the long straddlers headed for the exits as news from Greece failed to produce a major swing in the market.  Gambling on the news is just that: gambling.  It is something I do not want to be a part of and it leads down a dangerous path.  I am interested in looking for great companies, not playing guessing games with foreign governments and economies I know nothing about.  Why would someone in Miami or Chicago know more about Greece than people in Europe?  Why does that person think she has an edge over EU nations?  It is because she is looking for excitement and thrills in the market.

Now I am sure there are international specialists who spend their working hours studying foreign policy etc. and maybe it is fine for these people to play the market this way.  But the majority of people including myself have no edge over the experts and have no business trading things we are not specialists in.

What Ray Bradbury Can Teach Us About Income Investing

Ray Bradbury was a visionary. His uncanny powers to “predict” the future gain recognition with each passing decade. He had a fascination with magic in his youth that reinforced his desire to become a writer. As a magician, he understood that magic was anything but just that. He did not pull his predictions about the future out of a hat. He looked around and saw the characteristics of the people in his day and extrapolated them. As investors, we need to look around and find figures, facts, trends, and hypotheses that are based on more than just hunches.

General Mills’ (GIS) successful growth is a product of effort, not magic. Earning have increased steadily since 2005, with dividend payouts doubling over that period. A CAGR of 7% over the last 10 years and a beta of 0.5 make General Mills one of the most stable companies in the market. Recent negative news regarding the Yoplait yogurt business and fluctuating commodity costs have brought shares down from their highs in January. It will take an investor with vision to see past these temporary setbacks and look towards the bright future for General Mills.

For 69 years, he wrote every single day. Successful writers constantly practice their craft. If they did not, their work would suffer no matter how gifted they are. While watching our portfolio closely every single day may not be the best thing for income oriented investors, reinforcing our strategies and beliefs is crucial for staying true to our principles. Here are several books I recommend cycling through on a regular basis:

  1. Benjamin Graham’s The Intelligent Investor is a classic that is as true today as it was in 1949. It helps maintain a long term outlook on the market, and reminds us of the timeless truths contained in the book.
  2. The Strategic Dividend Investor by Daniel Peris is an excellent book that reinforces the importance of dividends and sticking to high yielding companies. While it is essentially an advertisement for his mutual fund, there are many gems of wisdoms contained within.
  3. A book often overlooked by investors due to its association with trading is Alexander Elder’s book Trading For A Living. Investors can skip the sections on technical analysis, but his insight into the psychology of investing is critical. He delves into the depths of the human psyche as it deals with fear and greed. His money management discipline is superb and it would be wise for investors to heed his advice.
  4. When I first started learning about investing I went through theMorningstar Workbook Series. They are a great way to stay sharp on fundamental analysis. It is also enlightening to see their total oblivion to the impending doom in the financial industry, as banks like Citigroup (C) and Bank Of America (BAC) have wide moats and are considered some of the safest stocks in the market back in 2006.

While he preached the dangers of media disconnecting us from each other, he was very involved in cinema, TV, and radio. He even ran his own show, Ray Bradbury Theatre. His understanding of living a healthy balanced life is one of the most important lessons for investors. I often find myself researching a market perspective exhaustively, being convinced it is the best path, and getting burned out shortly after. Maintaining a balanced perspective on the market will not only help with diversification and stability, but it will keep our emotions from swinging and will sustain us for the long haul.

His most famous work, Fahrenheit 451, has been cited extensively by scholars over the years. Common themes included government control, religion, repressed desires and more. But Bradbury made his own interpretation clear. In his words:

In writing the short novel Fahrenheit 451 I thought I was describing a world that might evolve in four or five decades. But only a few weeks ago, in Beverly Hills one night, a husband and wife passed me, walking their dog. I stood staring after them, absolutely stunned. The woman held in one hand a small cigarette-package-sized radio, its antenna quivering. From this sprang tiny copper wires which ended in a dainty cone plugged into her right ear. There she was, oblivious to man and dog, listening to far winds and whispers and soap-opera cries, sleep-walking, helped up and down curbs by a husband who might just as well not have been there. This was not fiction.

Ray did not foresee the evolution of social media. “Who do you want to talk to? All those morons who are living across the world somewhere? You don’t even want to talk to them at home,” said Ray about internet chatrooms. Facebook (FB) capitalized on our addiction to media and brought it into the social realm. Video games are now played on-line with others, creating virtual friendships that are meaningful to many. Investors may believe strongly about certain things, but to be successful we sometimes must see things from a different perspective.

A few years ago I visited a Children’s Place (PLCE) clothing store. I was considering investing in it due to its solid fundamentals and discounted price. When I went into the store I could not believe anyone would buy these clothes. I did not buy the stock, only to see it double shortly thereafter. What I failed to realize was there are other consumer styles aside from my own. The company was not even targeting my age group, and I had no business making a call on their products. Taking an objective view is often important, especially for trendy companies.

Conclusion: As investors, we are constantly bombarded with interpretations of the market. New books, shows, articles, black box programs, gurus and other distractions confound us every day. Ray said, “[Television is] a really dreadful influence on all of us. Don’t ever look at local television news again. It’s all crap. There’s no news, there’s no information. It’s negative, negative, negative. You look at that, and you think the world is coming to an end.” We have worked hard to build our own interpretation of the market, something that every successful investor must do. We cannot forget who we are as investors, regardless of the noise around us.

Cisco Systems (CSCO)

There has been a lot of bullish buzz around Cisco Systems lately and I agree.  They have been on the acquisition front and they have the balance sheet to do it.  Solid fundamentals make this an attractive play at the right price.  However, finding that price is a bit tricky.

Somewhere around 15 seems right.  Cisco has had a bumpy ride over the last couple years.  This makes a better trading candidate, although holding it for the long term has a case due to its great fundamentals.