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Are You Contrarian?

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Please note: This post is NOT an attack on any particular investment strategy or group of individuals who subscribe to them. I have no axe to grind. Please don’t take anything I have to say personally. But I do feel that it is always important for us to keep perspective and analyze why we are doing what we are doing… For all of us, the journey to financial freedom is all about winning back time.

Life is finite. Make the most of it!

The freedom of earning maximum time is the underlying and most important objective of them all. For many, it is far too easy to lose sight of that, and instead we so easily fall in love with our investment decisions. That is why I learned NOT to declare myself: a real estate investor, index investor, dividend growth investor, precious metals investor, etc.

I am none of the above. I am a financial freedom investor.

Chances are, you are too.

Contrarianism

When it comes to contrarianism, it’s far too easy for us to proclaim ourselves as contrarian investors, since anyone on the journey to early financial independence has already separated themselves greatly from the masses. However, when it comes to investing, you’re most likely to find that the majority invest in much the same way. These days, what’s popular is typically the following:

  • Expensive Real Estate
  • Dividend Growth Stocks
  • S&P 500 and other general indexes
  • Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), etc.

I’m not saying the aforementioned are bad investments, but you’ll be hard-pressed to find deep value at this particular moment in time.

For example, everyone that I know (almost) is desperate to buy San Francisco real estate when houses are more expensive today than perhaps they have ever been in history. Sure, of course I would love to own prime real estate, but I should know better that there is a time and place for such investments. If the market doesn’t agree with fair valuation then I will simply pass and move onto something else…

When it comes to dividend growth stocks, most everyone is out chasing: Johnson and Johnson (JNJ), Procter and Gamble (PG), McDonald’s (MCD), Emerson Electric (EMR), Chevron (CVX), the other major oil companies, etc., regardless, rain or shine. Similar to expensive real estate, the current valuations just don’t appeal to me at all. Sure, millions have been made by investors who got into these stocks in the past, but past performance doesn’t always predict future success… that is unless you are buying at, or near all-time lows! Anyone buying in today should realize that they are not early to the dance at all, but instead investing in very large companies that have limited growth potential. In fact, companies like EMR have declining sales and shrinking revenues.

That’s not to say that I haven’t fallen victim to the conventional trap myself… Earlier this year, I added shares of Caterpillar (CAT) to my portfolio because I was so accustomed to the common mantra of Buy and Hold. I let myself be so swayed into the “earning passive income” mindset that I completely discounted the important facts that I was:

  • Investing into a declining business.
  • Buying at expensive valuations.
  • Not extrapolating out into the future.
  • Entirely too myopic and solely enamored with receiving high-yielding dividends.

Money is made by looking into the future, not the present or past. As an investor, you want to buy today when nobody else agrees with you… when your ideas are dissonant and too esoteric for others to comprehend. What you really want is for everyone else to agree with you… later.

It’s logical to think that if you’re doing something that everyone else is doing then high margin returns probably aren’t within the realm of realistic probability…

I may be wrong, but I highly doubt that anyone will become an early millionaire or multi-millionaire investing in the aforementioned large cap stocks right now… It’s currently 2015, not 2009… Large cap blue chips aren’t cheap anymore… they’ve already more than doubled and tripled since they last bottomed out… and whether you want to acknowledge it or not, the economy is not booming, so don’t expect earnings to skyrocket much higher (without the use of financial engineering; e.g. IBM) in the near to immediate future.

Yes, I I understand that the main appeal with dividend growth stocks and cash flow real estate is passive income. By all means, own some (or a lot) of dividend growth stocks and cash flow real estate. I happen to own 8 rental properties that cash flow and I have no regrets! However, if you are truly contrarian, you will never force yourself into a closed box and ONLY stick to the same approach over and over again.

When cash flow real estate in the Bay Area stopped cash flowing, I avoided it like the plague! Why try and force a square peg into a round hole?

If it doesn’t work… it doesn’t work… Remember, we are all financial freedom fighters. Why limit yourself to just a SINGLE investment class?

A contrarian doesn’t. There is far too much to be gained by value hopping from one asset class to another…

From Macro Trends:

Screen Shot 2015-11-05 at 7.49.34 PM

It should come as no surprise that assets move up and down all the time, from undervalued to overvalued. No asset class goes ONLY vertical indefinitely!

The contrarian investor will look to exploit any price anomalies and buy what is disfavored by the market. How else do you make outsized returns? Certainly not by buying in with the retail crowd… who always seem to load up at the most inopportune times!

Alternative Paths to Freedom

Further, there is more than one way to reach early financial independence than just simply buying and holding throughout the entire journey. Yes, the standard approach definitely works, but for most people with a moderate income this strategy will take 15+ years to execute.

What if you desire to get to paradise much earlier in life?

Up until now, I have seldom come across freedom fighters willing to take a slightly different approach. In fact, the only investors who I know that have done so are the ones who are multi-millionaires and retired at a very young age. They are the ones who taught me that net worth can be converted into cash flow. They preach that when you are young you should be primarily focused on pursuing high return investments to first build up your principal. Once that is in place, you can then convert your high purchasing power into just about any investment class you want (if necessary), including the very popular dividend growth stocks or cash flow real estate that almost everyone starting the journey is buying into from the start.

Let’s say you turn $200,000 into $2MM… Take 5% (e.g. high-yielding dividend stocks such as Verizon (VZ), AT&T (T), Realty Income (O), Southern Company (SO), etc.) of $2MM and you get $100,000/year in passive income.

Hello early FI! Mission accomplished.

You can say that their approach definitely gave me a lot of things to think about…

Sure, you could in theory just keep on buying strictly cash flow investments throughout your quest to early FI (completely ignoring appreciation), but the only way to expedite your progress in that case is still to buy extremely high-yielding cash flow investments at the bottom of a cycle (e.g. 2009). But again, this goes back to the point that you must be investing in high return investments. Simply chasing cash flow irregardless of market conditions (ignoring tops and bottoms) will not produce the same lucrative results.

2009 was prime time to be buying stocks and real estate.

2015? Not so much…

Love What is Hated

When it comes to the hyper-growth stocks, most people focus on YESTERDAY’s hyper-growth stock. Had you invested in FB, AMZN, AAPL, NFLX, etc., in the past, you would have made a fortune by now! Congratulations! However, most people refuse to ever sell their winners and will ride the same stock up until it eventually plateaus and then declines… Without a doubt, investors become far too attached to their investments and investing becomes entirely emotional. Yes, AAPL was a killer investment from 2008 until now, but does anyone seriously believe that the stock will continue to double, triple, or quadruple from this point on? The market cap is on the cusp of $700 billion!!! And I certainly don’t see iPhone profit margins increasing in the future!

I’m not saying that I have all the answers, but I constantly force myself to question my thesis. Earlier this year, I realized that Bay Area real estate was starting to approach bubble territory so I was more than willing to step aside and pursue other opportunities. When I started up dividend growth investing again, it didn’t take me long to realize that I was chasing the market instead of letting opportunities come to me.

I halted that experiment when I realized that the risk vs. reward equation did not favor my odds of winning!

The fact is, if you really want to be a contrarian investor you must do things that other people are not doing (or willing to do). You must be extremely open-minded and constantly on the hunt for bargain basement investment opportunities that others will scoff at and dismiss at first glance.

Right now, I’m concentrating my investment capital on mining stocks because I see exceptional value there. When I share this idea with friends, I usually get the following response:

  • That sounds extremely risky.
  • I’ve never heard of those companies before.
  • The market cap is too small. The company will probably go bust.
  • What if the world stops using gold or silver?

Those thoughts are natural responses that pop up when you first hear about the idea of investing in the mining sector… I probably had similar thoughts myself…

But what separates the contrarian investor from the crowd is that the contrarian is open-minded enough to do their own research before forming a definitive opinion.

When I did my own homework, it didn’t take long for me to realize that mining stocks were selling at decade lows. A truly “once in a lifetime opportunity” as is popularly quoted. Today, true bargains are readily available. Even the best-of-the-best companies that are run by exceptionally competent and successful management teams are currently residing in the doghouse. In fact, the more I learn about the business, the more eager I am to speculate and buy more shares.

Again, I didn’t arrive at that conclusion at first glance. Like most everyone else, the opportunity sure looked risky to me when I first stumbled upon it. But if you are truly contrarian you will never accept something as fact on face value alone.

A true contrarian investor will:

  • Not fall in love with any particular investment or asset class.
  • Be open-minded and willing to try and experiment with new ideas.
  • Love a good speculation that has enormous upside potential and realistic probabilities for achieving massive future success.
  • Always be on the hunt for bargains and deals.
  • Forward looking and focused solely on the future, not stuck in the present day, or past.
  • Not make assumptions and declarative statements without first educating themselves.
  • Do a ton of homework and research before forming a conclusion.
  • Learn from experts in any particular field you are looking to participate in.
  • Be willing to court risk (that’s where most opportunities lie).
  • Exhibit extreme patience. As often the case, it takes a lot of time for sentiment to change and for the broader markets to finally agree with you.
  • Have the fortitude and conviction to weather the storm and undertake massive losses until the story finally plays out.
  • Accept failure and move on quickly (again, you must not be emotional because mistakes are always being made, especially if you are a contrarian investor. Don’t get attached to your loser picks.).

Please note: Being a contrarian doesn’t mean you don’t invest in conventional investment products. Far from it! Diversification is ALWAYS a good thing!

I love cash flow real estate, dividend growth stocks, index funds, etc. just as much as everyone else. Again, I’m currently holding 8 rental properties for cash flow…

The contrarian investor simply allocates a percentage (can be large or small depending on your risk appetite) of their portfolio to speculations that offer the most potential for massive upside gains.

It’s really all about courting opportunity and upside potential.

Deep value discounts.

Yes, with mining stocks they are entirely more speculative and risky, but I’m still willing to move full-steam ahead because I see tremendous potential there. But I completely understand why these type of stocks wouldn’t be suitable for everyone. And I would never recommend anyone else invest in them!

But as of today, mining stocks are a contrarian investment. In fact, they might be the single most contrarian investment out there because they are perhaps the most heavily discounted and hated. These stocks are absolutely dirt cheap right now!!!

In a different market cycle, such as from 2009-2012, real estate was down in the gutter and probably the most lucrative and contrarian investment opportunity available for investors. Stocks weren’t far off. I loaded up on both and thank my lucky stars that I did.

Who knows what the future will hold? Maybe it’s Bitcoin? Whatever it is, if you are a true contrarian, you will embrace opportunity with open arms and educate yourself first before dismissing the idea off as crazy.

Most of my friends think I’m a lunatic for speculating into gold mining stocks right now. But then again, they told me the exact same thing when I was buying real estate in 2012.

I’m not saying I’ll be fortunate enough to replicate the same success this time around. There’s no way of knowing that… But I do feel confident that the odds are definitely in my favor.

As a contrarian, I’m quite simply just chasing deep value discounts that are hated by everyone else.

And if history is any indicator, that contrarian strategy seems to work time and time again.

We’ll see how things go!

Happy Investing/Speculating!

{ 15 comments… add one }
  • Income SurferNo Gravatar November 6, 2015, 2:56 am

    Hello fellow Contrarian! While I don’t always love what others hate……I am confident that those assets are a great place to look for value! Your chart above further illustrates why I love non correlated assets. Global money flows tend to slosh around from asset to asset. I hope you have a great weekend buddy!
    -Bryan

  • No Nonsense LandlordNo Gravatar November 6, 2015, 6:46 am

    The contrarian strategy has performed well for the Fidelity Contrarian Fund (FCNTX). While I like the idea of buying when others are afraid, you have to look at the numbers. When buying a rental, as long as the cash flow and ROI are there, the underlying asset value doesn’t matter as much. The same with dividend stocks.

    With other asset classes, you have to diversify. That is why the S&P is appealing. You always have the best sector, the worst sector, the most undervalued sector.

    While not too flashy, it has been the king of investments for many investors.

  • MikeNo Gravatar November 6, 2015, 8:49 am

    Nice article.

    Here is what I have not heard you touch on and is by far one of the most important topics: EXIT STRATEGY.

    What is it? Do you protect your losses or is all this just play money that if it evaporates, no big deal? I know you repeat your mantra “I only speculate with money I can afford to lose”. That is a loser mentality. Who goes into an investment saying I can afford to lose it so no biggie. This isn’t a casino this is your financial future.

    While I certainly agree with everything your saying, if you bought gold six years ago you are flat. If you bought anytime within the past 6 years you are most likely down. If you bought gold related stocks (miners) you are definitely down from 6 years ago.

    In my humble opinion, being flat is just as bad as being down. It means you’ve locked up your money and its done nothing for you. You’re taking more risk than letting it sit idle yet it yields the same result. My fear isn’t that Gold won’t rise, its as you mentioned the “when”. My fear is that “when” could be a few more years out. I want my money working as hard as I do, not sitting on the couch being lazy.

    I am waiting for a turn around. I will miss the initial pop but I will get in to ride the wave. When it does reverse it will be violent and sure I would have wished I could have captured the inital 20% increase, but I will quickly hop on board for the 300% ride up. In the mean time my money will be earning more money so i can have more to put in which will offset the missed gains on the initial pop.

    Who knows time will tell if you are a sage or a loon. I like your style and you mirror a lot of the qualities the great investors have.

    I am rooting for you!

    • FI FighterNo Gravatar November 6, 2015, 9:20 am

      Mike,

      I can assure you that I am not getting into speculations with a loser mentality and the expectation to fail 😉

      I definitely would not be placing such large bets if I expected such a disastrous outcome. Nevertheless, I always believe it’s in an investor’s best interest to consider the worst-case scenario. What is the ultimate downside risk? Of course, it’s always to lose everything. If such were to happen, I take solace in the fact that I would still own my cash flowing rental properties and have ample money in the bank. Such a step back would hurt, no doubt, but I would still survive.

      With that said, I expect this bet to pay off massively in the future. I’m extremely optimistic and confident! I am doing my best to back the best management teams who have had tremendous success before in the past:

      http://www.fifighter.com/precious-metals/2015/10/mining-all-star-lineup-my-100000-lottery-tickets/

      Ross Beaty
      Lukas Lundin
      Robert Friedland
      Keith Neumeyer
      Bob Quartermain
      Mark O’Dea

      Most outsiders (by no means am I suggesting you) are quick to make assumptions before researching the facts. Just do a google search on those names and look at their respective track records and history. Most (if not all) of these guys are billionaires who have created tremendous wealth for investors over the years:

      Pan American Silver
      Lundin Mining
      Diamond Fields International
      Silver Standard Resources
      Fronteer Gold
      First Quantum Minerals
      First Majestic Silver
      etc. etc.

      What are the odds they all fail in their current ventures? Pretty close to zero.

      While most of the major producers trading on the NYSE are still retracting and may fall further still, this isn’t necessarily the case for all mining stocks… In this space, you have to dig in deep to find out what’s really going on. Canadian and Australian miners, high quality ones, have already bottomed or are pretty much trading close to it.

      Check out companies like:

      Northern Star Resources (NST)
      OceanaGold (OGC.TO)
      Perseus Mining (PRU.TO)
      Endeavour Mining (EDV.TO)
      Teranga Gold (TGZ.TO)
      Newmarket Gold (NMI.TO)
      Kaminak Gold (KAM.V)
      True Gold Mining (TGM.V)
      etc, etc.

      I think you have a great strategy — there’s no desperate rush to get in right this moment. I was definitely early myself, but I have no regrets… I’ve been able to establish positions in quality companies at attractive prices.

      Can prices keep dropping? If we use this morning as any indication, absolutely… But as I’ve said before in the past, it’s quite obvious that the remaining downside is minimal and the potential upside enormous.

      That’s the appeal with these stocks.

      And when in doubt, chase: Quality, Quality, Quality.

      I made the big mistake of buying Rubicon Minerals (RBY) and got burned by that pick due to incompetent management. My last buy was into McEwen Mining (MUX) backed by Rob McEwen, the founder of Goldcorp. Definitely, I make mistakes but try to react quickly to learn from them. This time around, I’m going with the best of the best, the cream of the crop.

      So, no doubt I expect to succeed because I’m following people who pretty much only know how to win big and deliver results. I’m not that smart and in this instance I don’t need to be.

      And one of the best speculations you can ever hope to make is when the question is “when” and not “if”. That eliminates 99% of the risk. For sure, I have the patience to ride out this storm because when the tide turns, like you said, the rise to the upside will be spectacular. I don’t care about dividends or cash flow in the short-term. I’m focused on the long-term. If this move pans out, the appreciation gains will be equivalent to a lifetime of cash flow for most folks.

      All the best!

  • TawcanNo Gravatar November 6, 2015, 9:12 am

    Wow that’s a lot of points to consider for me. Time to put on my thinking hat and schedule some thinking time to think about the points you brought up. Great post FI!

  • joeNo Gravatar November 6, 2015, 1:37 pm

    perhaps you should buy some alibaba? that would work well with your contrarian mindset….

    • FI FighterNo Gravatar November 6, 2015, 1:54 pm

      Alibaba is a great company with a bright future. But I guess haters are just gonna hate…

  • JohnNo Gravatar November 6, 2015, 6:16 pm

    Living in the bay area, I agree RE and stocks are at crazy levels. Why did you sell only stocks and not some RE to raise money for investing in precious metals?

    • FI FighterNo Gravatar November 9, 2015, 9:51 am

      John,

      Stocks are more liquid and easier to trade in and out of. I’m holding onto the rentals for purely cash flow, irregardless of their market valuations.

      Ultimately, I just didn’t want to be in both stocks and real estate when I instinctively feel like they are both sitting in bubble territory.

      All the best!

  • bethNo Gravatar November 7, 2015, 3:24 pm

    I just bought Lundin Mining and a small Canadian oil company this week because they are both down. I am trying to become more contrarian but I am not young and I don’t make much money so I also have Vanguard ETFs and Canadian bank stocks that pay a decent dividend.

    I am trying to retire early but I can’t afford to lose much money. It is hard to know how much to keep relatively safe, the ETFs, and how much to try and play the market trends with and still sleep well at night.

    • FI FighterNo Gravatar November 9, 2015, 9:55 am

      Beth,

      Great point. It’s a lot easier to speculate when you are younger and have time on your side to recover from any catastrophic losses… This strategy is definitely not suitable for someone closer to retirement.

      Lunding Mining is backed by one of the legends in the business… It’s in good hands. I might add shares of Lundin Gold in the future once they further de-risk the Fruta Del Norte project. That one has huge potential as well. Kinross paid over $1 billion for the deposit and Lukas Lundin someone found a way to fleece it from them for $240 million. The rich keep getting richer because they are savvy investors…

      It’s great to diversify and balance, and it looks like you’ve been able to do that.

      Yup, ultimately, it’s about doing everything we can to position ourselves well for success but also allow ourselves the ability to sleep well at night. 🙂

      All the best!

  • RyanNo Gravatar November 9, 2015, 7:10 pm

    I completely agree that more people should be contrarians and become active investors instead of solely rely on passive income. Nice demonstration there.
    However, contrarianism has limits and I think being a contrarian on the stock market is a very bad thing. Unless you’re willing to dedicate your life to stock picking and technical analysis, “Following the money” is by far a much better strategy on a long run. By definition a stock price goes up when a lot of stock is being bought, not when none knows it even exists ;). So following the money really means that you invest where large hedge funds invest. Why? Because they make the trends.
    In today’s market the quality of a product, the talent of the management, even the demand for a certain product, is vastly irrelevant. What matters the most is what stock these major hedge funds choose to buy. When they invest in a company, they buy so much of its stock, that this company’s stock, regardless of the quality of its products and its management, will go up.
    For example, yes, Silver will probably go up again. When? When large hedge funds decide to massively invest in it. At that point, it will be smart not to be a contrarian at all, but to join them, surf the wave and reap the benefits.

    • FI FighterNo Gravatar November 10, 2015, 10:19 am

      Ryan,

      I love the strategy of following the big money. In the case of gold, the heavy hitters: Druckenmiller, Dalio, Icahn, etc. have already started moving into the yellow metal.

      One thing to make note of, though, is that the big money can only move into the liquid funds: GLD, and other large cap miners such as Barrick (ABX), Newmont (NEM), Goldcorp (GG), etc.

      If a speculator dabbles in the junior mining sector, they may want to gain entry before the crowd starts to rush in. These stocks are essentially microcaps and move drastically on any volume… So, I’m more than willing to get in too early to get well situated now. I prefer juniors and sub $1 billion companies, for the most part.

      But yes, I agree, to make money you gotta follow the money.

      Take care!

  • JPNo Gravatar November 11, 2015, 2:57 am

    Thanks for the article.. Always good to have an open mind to investments out of your comfort zone. Speaking of which.. What platform do you use for your investments? Etrade or something with fewer fees? I signed up for motif investing last night but they don’t have any of the mining stocks.

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