Being contrarian can be very lucrative

[nioka]

I see a large part of the problem as organizations and markets which make money from share trading rather than the companies that are represented by the shares.

The theory of the stock market is that companies float with a prospectus, investors buy shares based on the story and the quality of the management. Again in theory the company proves commercially successful - or fails- and the result is reflected in the SP and/or dividends.

The reality ? I think the stock market resembles a giant casino with hundreds of mini games. Many are bent and almost all with the house taking it's cut.

In this reality the stock brokers and stock markets are forever wooing punters to buy shares because

1) They get commissions on sales
2) They are selling shares for companies and get commissions on successful placements
3) The owners of the stack market get wealthy on the turnover.

It doesn't actually matter a hill of beans what gets sold , or how worthwhile it is. Every sale rings a commission regardless of the quality of the stock. That should make one think.

Again in this reality if someone can just tell a good enough story to get enough people to believe a stock will be a winner that belief alone will encourage enough people to jump in and create the price rise that will give the quick buck. We call this ramping don't we ? Or it could be market sentiment.

And sitting in the middle of all this are the people who establish companies with a pitch and a prospectus, give themselves millions of shares for their efforts and then turn these paper assets into real dollars if they can convince enough punters to jump in.

All of this will make big, quick bucks. You would have to be a right mug to pass the easy money for the hard uncertain work of actually building a profitable business when it could be so much easier to play this game.

And this is the cornerstone of our economic system and our financial security.

way too late. Lets pack this in...:

Agree 99% As I say "Pyramid selling"

However I dont agree that it is too late and we should pack it in. Realise it is happening and will not change much in the short term. Ride with the punches and use them to your advantage.

 

[doogie_goes_off]

The quickest way to make a million is take $1 off a million people. The punter mostly loses out to the middle man.

 

[robusta]

The problem if there is no catalyst for the market to bridge the gap between what you think the intrinsic value is and the current market price there is no reason why the stock will not continue to trade at that discount. But in the interim there is a huge opportunity cost associated with holding the stock if it just goes sideways and even more so if it goes down.

We may have to agree to disagree on this one suhm.

Yes the stock may trade at a large discount but in my opinion this should be more than compensated for when price does catch up to value particularily if you are invested in a company with a rising intrinsic value.

As for opportunity cost when following the trend do you ever have stocks that plateau or reverse trend with its own opportunity cost risk plus extra brokerage, taxes ect ?

 

[suhm]

I actually don't trend follow, but now I look for a reason for the market to bridge the gap, I don't have the capital base to hold stocks for years and now I'm willing to miss the first 10-20% before buying in.

 

[robusta]

I actually don't trend follow, but now I look for a reason for the market to bridge the gap, I don't have the capital base to hold stocks for years and now I'm willing to miss the first 10-20% before buying in.

Ok I think I understand how this may work for you. You find a quaility undervalued company and then wait for some positive macro economic, industry or company specific news before buying. Is that correct?

 

[So_Cynical]

Any of the LICs

Any of the LIC's...i follow a heap of LIC's and most of them offer a easyish 8 or 12% bottom to top as they drift sideways...BKI and ALF great examples of that over the last 12months, but sure i can see where your coming from as they are both trading under asset backing (as pretty much all LIC's do) and both trending down (sideways at best) over the last 12 months.

LOL probably makes ALF look like a good buy.

I don't have the capital base to hold stocks for years and now I'm willing to miss the first 10-20% before buying in.

I've always wondered who was on the other side of my trades when im exiting after a 10 to 20% run up from the bottom...and now i know.

 

[robusta]

OK I guess by definition a contrarian thread will never be popular. I thought I might list a couple of investments I have made that might generate some interest. I understand it is a fine line between value investing and contrarian investing but here goes:
FGE Forge Group. OK these guys are the flavour of the month but when shares purchased from mid- April to late May we were in the middle of mining tax, soverign debt and talk of asset bubbles in China.
Average price paid $2.582
Price Today $3.71
Paper Profit 43.7%
Dividend to be paid $0.05

JBH JB HiFI. JBH also look good but when purchased mid June things were not looking good (read above minus mining tax)
Average price paid $18.636
Price Today $21.81
Paper Profit 17%
Dividend received 0.33

FRI Finbar Group. To quote Comsec Market Bulletin regarding sharemarket sectors " Real Estate - Investors are not ready to embrace commercial property " All other sectors except IT are rated index weight or over weight.
Purchased early this month
Average price paid $1.061
Price Today $1.025
Paper Loss -3.4% I hope it gets cheaper so I can buy some more.

It's been about 3 1/2 weeks since the above post and I thought I might update my little contrarian portfolio's progress. After the above post I recieved a bit of feedback from trend followers particularily regarding the loss with FRI with warnings of opportunity costs, the trend is your friend ....
FGE
Average price paid $2.582
Price Today $4.07
Paper Profit 57.6%
Dividend recieved $0.05

JBH
Average price paid $18.636
Price Today $21.13
Paper Profit 13.4%
Dividend received 0.33

FRI
Average price paid $1.061
Price Today $1.025
Paper Profit 17.8% I hope it gets cheaper so I can buy some more

 

[ParleVouFrancois]

Surely that's a typo robusta (FRI price)? Either that or my eyes are broken again and I need new glasses!

EDIT: Checked on ASX just then, 1.25 nice buy there.

 

[So_Cynical]

It's been about 3 1/2 weeks since the above post and I thought I might update my little contrarian portfolio's progress. After the above post I recieved a bit of feedback from trend followers particularily regarding the loss with FRI with warnings of opportunity costs, the trend is your friend ....
FGE
Average price paid $2.582
Price Today $4.07
Paper Profit 57.6%
Dividend recieved $0.05

JBH
Average price paid $18.636
Price Today $21.13
Paper Profit 13.4%
Dividend received 0.33

FRI
Average price paid $1.061
Price Today $1.025
Paper Profit 17.8% I hope it gets cheaper so I can buy some more

Yeh but its a little like...what hasn't gone up in the last 3 and a half weeks.

 

[Julia]

Yeh but its a little like...what hasn't gone up in the last 3 and a half weeks.

Excellent point. If there had happened to be a series of bad news events from the US, and/or here, the market would likely have gone down instead of largely up.

This is not to rain on your parade, but just to keep a check on the macro economic factors involved. Hope your picks continue to do well.

 

[robusta]

Yeh but its a little like...what hasn't gone up in the last 3 and a half weeks.

Fair point but I think FRI may have outperformed the market.

Excellent point. If there had happened to be a series of bad news events from the US, and/or here, the market would likely have gone down instead of largely up.

This is not to rain on your parade, but just to keep a check on the macro economic factors involved. Hope your picks continue to do well.

Thankyou Julia and yes once again I don't discount a bit of luck in the timing.
If the market had gone down instead of up I probably would have bought more of this business.

"Over long periods of time, the share price of an extraordinary business tends to follow the increasing intrinsic value of that business." Roger Montgomery

So following on with that logic I valued all three companies at a discount to intrinsic value with that value rising over time before buying. When bad macro economic news causes that sp to drop I check my calculations and buy more of a good thing at a greater discount to intrinsic value. This worked well with FGE.

Thought I might have to wait longer than 3 weeks for FRI to start to appreciate but still think more to come....

 

[robusta]

OK I guess by definition a contrarian thread will never be popular. I thought I might list a couple of investments I have made that might generate some interest. I understand it is a fine line between value investing and contrarian investing but here goes:
FGE Forge Group. OK these guys are the flavour of the month but when shares purchased from mid- April to late May we were in the middle of mining tax, soverign debt and talk of asset bubbles in China.
Average price paid $2.582
Price Today $3.71
Paper Profit 43.7%
Dividend to be paid $0.05

JBH JB HiFI. JBH also look good but when purchased mid June things were not looking good (read above minus mining tax)
Average price paid $18.636
Price Today $21.81
Paper Profit 17%
Dividend received 0.33

FRI Finbar Group. To quote Comsec Market Bulletin regarding sharemarket sectors " Real Estate - Investors are not ready to embrace commercial property " All other sectors except IT are rated index weight or over weight.
Purchased early this month
Average price paid $1.061
Price Today $1.025
Paper Loss -3.4% I hope it gets cheaper so I can buy some more.

Almost three months since the above post time to update and I have just added another holding to this portfolio

DWS Advanced Business Solutions Limited. DWS on the 1/12/10 announced a reduced EBITDA forecast due to reduced work for a client in the telecommunications sector. The sp plunged from ~ $1.55 to ~ $1.25 in two days.
DWS Advanced Business Solutions Limited
Average price paid $1.294
Price Today $1.27
Paper Loss -1.4%

FGE Forge Group
Average price paid $2.582
Price Today $4.59
Paper Profit 77.8%
Dividend received $0.05

JBH JB HiFI
Average price paid $18.636
Price Today $18.69
Paper Profit 0.3%
Dividend received 0.33

FRI Finbar Group
Average price paid $1.061
Price Today $1.31
Paper Profit 23.5%

 

[ParleVouFrancois]

Hey Robusta, you should check out a thread by SKC, "SKC fundamental positions" or something, his method appears to differ to yours a little (more of a short term focused arbitrage sort've gig going), and both differ from my 'value investing' style of deep value plays (CFE and LNC 1 or 2 months ago good examples of the types of companies and at what prices I like to buy). Just a suggestion to have a look, it's a good read, and you might look to branch out a little from ol' Roger Montgomery's Value-Able method of valuing stocks .

 

[robusta]

Hey Robusta, you should check out a thread by SKC, "SKC fundamental positions" or something, his method appears to differ to yours a little (more of a short term focused arbitrage sort've gig going), and both differ from my 'value investing' style of deep value plays (CFE and LNC 1 or 2 months ago good examples of the types of companies and at what prices I like to buy). Just a suggestion to have a look, it's a good read, and you might look to branch out a little from ol' Roger Montgomery's Value-Able method of valuing stocks .

Thankyou I will have a look - allways looking to learn. CFE and LNC are not really on my radar as I have trouble finding a value for mining / energy stocks.
I bought a heap of ERA earlier this year and only got out loosing half my shirt.

Mind you I have found the returns using ol' Roger Montgomery's Value-Able method of valuing stocks to be very satisfactory so far.

 

[skc]

Thankyou I will have a look - allways looking to learn. CFE and LNC are not really on my radar as I have trouble finding a value for mining / energy stocks.
I bought a heap of ERA earlier this year and only got out loosing half my shirt.

Mind you I have found the returns using ol' Roger Montgomery's Value-Able method of valuing stocks to be very satisfactory so far.

I always find it amusing that people debate about trend following vs fundamental with one camp usually avoiding the other like a plague...To me the best thing to do is to exercise both strategies. There will be times when the market is poised for breakout and every boat is raised by the rising tide, and there will be other times when the market is disgruntle and only fundamental analysis will throw up good investing / trading opportunities.

P.S. Bought some ERA last week which was definitely contrarian...

 

[skc]

Hey Robusta, you should check out a thread by SKC, "SKC fundamental positions" or something, his method appears to differ to yours a little (more of a short term focused arbitrage sort've gig going), and both differ from my 'value investing' style of deep value plays (CFE and LNC 1 or 2 months ago good examples of the types of companies and at what prices I like to buy). Just a suggestion to have a look, it's a good read, and you might look to branch out a little from ol' Roger Montgomery's Value-Able method of valuing stocks .

My thread is actually quite boring... I was just attempting to show how one might find decent opportunities with some fairly elementary analysis. But actually more importantly I wanted to show how one needs an exit plan for fundamental positions. Too often people got hung up thinking they bought into good companies and just couldn't let their position go... hopefully I will able to show how that is done in that thread with some of the losses.

I posted some simple analysis here on DWS. https://www.aussiestockforums.com/forums/showthread.php?p=596170&highlight=dws#post596170

If I was a holder on fundamentals I would be selling, as clearly assumptions of growth made in the valuation model have proved incorrect. There is no reason to give management benefit of the doubt with your hard earn. With fundamental investment I prefer big fat margins of safety and not relying on optimistic scenarios playing out. For DWS it may well turn out to be a small bump on the road, but the truth is it is impossible to tell from the information available without an element of faith.

 

[frankbaozhu]

All of you guys have good points. There are multiple ways to earn big bucks in the market. It is as true to a value investor as to a day trader. The only question is if you are good enough. To me, Mr. Warren Buffett is the most successful one ever in this business, and it makes sense to follow his lead. Why bother to try other stuff while the method to success has been tested over forty years?

 

[robusta]

All of you guys have good points. There are multiple ways to earn big bucks in the market. It is as true to a value investor as to a day trader. The only question is if you are good enough. To me, Mr. Warren Buffett is the most successful one ever in this business, and it makes sense to follow his lead. Why bother to try other stuff while the method to success has been tested over forty years?

That is my aim. IMO the technique I am following is the closest I can find to Buffett's. I would appreciate any input positive or negative however.

 

[Tysonboss1]

All of you guys have good points. There are multiple ways to earn big bucks in the market. It is as true to a value investor as to a day trader. The only question is if you are good enough. To me, Mr. Warren Buffett is the most successful one ever in this business, and it makes sense to follow his lead. Why bother to try other stuff while the method to success has been tested over forty years?

Number crunching only gets you so far, The investors broad knowledge of the economy, business etc.etc is what separates the Great value investors from the also rans.

Also many people claim to be value investors who clearly are not.

 

[Tysonboss1]

Being contrarian is just that and it is gambling.

I would say that buying an overly popular stocks, at levels far above their intrinsic value that already has overly optimistic future earnings forecasts priced into them is more of a gamble than buying a company that in trading not far above it's net asset value while producing solid stable earnings but for some reason has been forgotten by the market.