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Don’t follow the crowd !
Contrarian investing in modern times
Over the last few months it seems like there has been a new theme for people that follow macro accounts. The new idea is that the USD is going to lose all it’s value, as China and the BRICS+ Nations are going to free the world from the American dominance.
And while the share of the Yuan used in international trade is growing, the USD is not even near a point, at which the USA would lose the world reserve currency status.
In this part of WEEKLY INVESTING FOCUS I want to dive deeper into contrarian investing. Is it really smart to do the opposite of what most market participants do ? And which mindset should we adapt, in order to profit from such situations ?
Let’s get into it:
1/ Finding your edge
In investing people often talk about finding an edge. But what is an edge ? Well an edge is an advantage that you have over your competitors. Now if you are investing into the stock market, you are entering the biggest playground in the world. The most brilliant people on this planet will compete against each other, since they know that if they succeed, they are going to become extremely wealthy. Now how can retail investors like you and I compete with these geniuses ?
Albert Einstein gave us the solution a long time ago:
“A smart person solves a problem, a wise one avoids it“ — Albert Einstein
Your edge can be a mathematic formula that predicts supply & demand. But you can simply use your natural advantage. Which advantage am I talking about ?
Simply by choosing your opponents, you will have much more success. It’s the same in investing, so many people try to become rich by investing into large caps from the US. The problem with this is, that millions of people follow these stocks, therefore these stocks are either perfectly priced, or overpriced compared to there future earnings.
My Investing philosophy is therefore that the more absurd and crazy the investment looks like, the better. Just by searching for small caps, the success rate will increase dramatically. If you find small caps in some obscure little countries in Easter Europe, Africa, Latin America or Asia, you will be able to find hidden gems that no fund manager form the US has ever heard of.
Look at the map below, this is a map of all my readers on Substack.
Most of you are not native English speakers, so go out and look for stocks in your native language. the edge in this case is, that most fund managers from the US will be never able to read the financial statements of company from Estonia for example. Well luckily for you there are tools that will make it easy for you to translate these PDFs into your chosen language. But most institutional investors are either to lazy to do this, or aren’t allowed to invest into specific countries and industries.
A few years ago BlackRock for example left them Turkish and Pakistani stock market.
Of course things are often hated for a reason, but if you were able to find the hidden gems in these countries you will be probably very happy right now. Monish Pabrai for example is up nearly 45x with his investment into the Turkish company Reysas, which he did in 2018 !
So what the bottom line here ? If you can’t be smarter then the big guys, try to avoid fighting them. Invest in places that are so toxic, that they would never even think about touching it. If you speak a language besides English, use your natural advantage. And if you work in one industry, be open minded and look with open eyes what is going on, it can be very lucrative !
2/ Contrarian Investing
Doing the opposite of what the crowd does can be a very lucrative thing. Buying when there are panics and selling when there is euphoria is a classic method that will always work. Because humans are animals that are controlled by there emotions.
But I have to warn you, if you enter this playing field you need to find yourself a hobby that you can invest a lot of time into. Because you have to cut out the noise and leave the stock market for several weeks from time to time. This will be refreshing for you. I promise that this will change your view of the markets. And sometimes it’s the only way to not go insane.
And one advice, try to stay away from shorting. The market can stay longer irrational then you can stay liquid (!), just look at NVIDIA for example.
Hated Industries are the perfect play ground:
If you think of junior miners and small cap Canadian oil & gas companies. What comes into you head first ?
For most people capital destruction and shareholder losses will be the first thing they think of. And I don’t blame them, investing in junior miner is extremely risky and most people lose 99% of there money. And small cap Canadian E & Pˋs have lost 70% over the last 10 years.
[Great graphic by]
But if you really want to be contrarian look at Canadian small caps, preferably in the commodity space. I promise that things will get obscure, but there are some interesting names if you dive deeper.
The Cycle of Boom’s and Bust’s:
We all know that there are Boom’s and Bust’s in every cycle. The interesting thing is, that in the Bust face often 90% of companies go bankrupt. But the 10% that survive are the ones that are truly remarkable. Because they had managment that was able to let the company survive even in this troubling times.
One example is the offshore oil & gas industry. In the bear market since 2008 most companies went bust. But the companies that survived had to become creative. So they changed the design of there drilling equipment and made it more then 50% more efficient.
When I see that an industry that is critical for human live is at the low of a cycle I get really interested. So if anyone has a good idea, feel free to post it in the comments and become part of our community.
Fertilizers, Chinese stocks and European energy stocks are just a few examples of ideas I wrote about on this Newsletter.
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