[ZT] contrary investing

Positive_Theta

Today I'm going to give you my two cents on Dow 10,000.

But first, a note on contrary investing, the practice of paying attention
to the sentiment of the masses ... and leaning the other way.

Twenty-three years ago, I attended my first Contrary Opinion Forum, an
annual gathering of independent-minded investors (both individuals and
professionals) in Vergennes, Vermont.  I was one of the youngest people in
the room, and I took copious notes, intent on capturing the wisdom from
the white-haired veterans who spoke.

I've returned every year since, with the exception of one, and now some of
my own hairs are white.

More important, I now know that those guys up at the podium don't have all
the answers.

So why do I go?  To get ideas, to meet old friends, to get out of the
daily routine, to see some beautiful Vermont foliage ... and to get a read
on the consensus opinion.  More on that below.

As for those speakers, this year they included Michael Aronstein, David
Hale, Alan Shaw, Louise Yamada, Hugh Johnson, Robin Carpenter, Bill McVay,
Karel Samsom, Charles Blatteis, Dean LeBaron, Walter Deemer, Mark
Ungewitter and Kathryn Welling.

I'm not going to go into the details of their presentations; if you're
really interested, come next year and you can see me, too.  But I will say
this--the speakers tend to be of two camps, fundamentalists and
technicians.

The fundamentalists say things like this:

"Back in the 1920s the excess was in stocks; In the 1990s the real excess
was in housing and credit.  So the recovery from the latest big crash will
be very different from the recovery from the earlier big crash.  In the
years ahead, the real estate and housing industries will continue to be
troubled, while the stock market will do just fine. ...  The trouble is,
the Federal government is now assuming an increasing debt load, and people
support that.  Eventually, the U.S. will default on its debt ... but
that's years away."

"Over the next five years, your best investment opportunities will come
from emerging markets.  There are 8,300 banks in the U.S. and 7,000 of
these banks have less than $1 billion in assets ... much of it in
commercial real estate, which will cause trouble in the year ahead.  In
Germany, the majority of banks are owned by the state, and that will cause
trouble.  Back in the U.S., states are having trouble; many will begin
selling assets to raise cash ... airports, highways, state houses."

"The fact that the U.S. government has failed to put anyone in jail for
this financial collapse is troubling.  The FBI has been focused on
terrorism.  Our courts are overloaded.  Our prisons are overloaded.  And
many of the people responsible for this collapse are expecting to get big
bonuses this year."

"Thirty-five percent of mortgaged property in the U.S. is upside down.
Fifteen million homeowners are at risk.  The average retirement account is
down 27%.  As result, people don't feel wealthy.  And if people don't feel
wealthy, they won't spend money, which means the recovery will falter."

And most memorably ... "Based on the historical evidence, we are likely to
experience either painful debt deflation or highly destructive monetary
inflation--and perhaps both at the same time."

The technicians say things like this:

"I see parallels between the charts of 1907 and 2008."

"Gold is in a long-term uptrend.  In fact, it's our favorite asset
class."

"A cyclical bear market has begun. The next bull market will begin in
2018."

"Most sectors are extended now, but I see a good long-term base in
technology stocks."

And then they all get together for drinks and dinner, discussing what they
just heard, offering their own projections/prescriptions for the
weeks/months/years ahead and, in general, sharing opinions.

Because when you get right down to it, that's what these are.  Opinions.

And as the quote on the mantel beside my desk says, "Markets are never
wrong; Opinions are."

Now, I'll admit, I've been guilty of expressing opinions, too.  There's
nothing wrong with sharing ideas.  When it comes to investing, however, I
much prefer to simply listen to the market carefully and act accordingly.

But here's a funny thing.

The name of the forum, as I said at the start, is the Contrary Opinion
Forum.  The gathering was begun 47 years ago by the Vermont Ruminator,
Humphrey Neill, an investor/philosopher who honed the craft of Contrary
Opinion for decades and wrote "The Art of Contrary Thinking" in 1954.  (My
father, Cabot's founder, was an attendee for decades.)  Humphrey's
disciple Jim Fraser, founder of Fraser Management Associates, carried on
the tradition, while publishing "The Contrary Investor Newsletter," and
today the forum continues, hosted by Alex Seagle, the current President of
Fraser, who, if not a true contrarian, has the good sense to keep a great
tradition going.

But the folks who attend, as a whole, are not contrarians!  And I say this
from experience.  At market bottoms, they are pessimistic.  (At last
year's forum they were shell-shocked; no one had foreseen the implosion of
the financial sector.)  At market tops, they are optimistic.  And in
recessionary times, they foresee difficulties exiting the recession.  They
watch the same news stories as most investors, and read the same
statistics, and while they can certainly be creative in their thinking,
they tend to reside in the same place, sentiment-wise (on average), as the
average investor!

So when I go to the forum--and this is a habit my father taught me--I
categorize each speaker as a bull or bear, count the totals at the end,
and then resolve to act contrarily to their consensus sentiment.

This year, the tally was four bulls to six-and-a-half bears, which makes
me feel good.

Also, I got a good quote.  "You can only see as far as your headlights ...
but you can make the whole trip that way." E. L. Doctorow wrote that, but
he didn't attend.

AGA7d

Very good post!