Contrarian Investing -- What Do You Think?

[honvl]

Yesterday I joined a defensive smart alpha model with a 50% TLT hedge and invested my portfolio with the Monday rebalance. Today, I am getting destroyed by the TLT hedge.

[WalterW]

I am getting destroyed by the TLT hedge.

1. TLT is down only 1.65% at the moment.
2. TLT is a hedge. How’s the remainder of your portfolio doing?

Walter

[mgerstein]

Steve,

I wasn’t sure what I would write on Forbes when I woke up this morning, but you’ve inspired me!

Here it is:

The Dirty Dozen: 12 Genuinely Awful Investments

[honvl]

TLT is down 1.52% at the moment, and the rest of the large cap portfolio is up 0.97%. The volatility of the hedge on the way down is concerning.

[WalterW]

The volatility of the hedge on the way down is concerning.

Well, Brexit did pump things up a bit lately. I don’t check TLT daily, but when I last checked I was a bit surprised at how much the yield fell.

Since P123 now supports individual ETFs in book, my future Smart Alpha offers will be hedge free. That way subscribers can choose hedges that satisfy their investment point-of-views.

Vive la différence!

Walter

[InspectorSector]

Nice article Marc. It sounds like you should be holding TBT, a no lose position.

Folks, don’t forget there are 4 or 5 EU exit referendums still coming this year. BRexit is nothing compared to what is to come.

TLT is volatile at this level so if you are volatility-adverse then it is not for you.

Steve

[WERNER]

“TLT is down 1.52% at the moment, and the rest of the large cap portfolio is up 0.97%. The volatility of the hedge on the way down is concerning.”

Hm. If you are worrying about a “terrible” downturn of 1.5% (while up 1% on the long side), then you are way overexposed, overleveraged or have too much capital at stake.

[InspectorSector]

Going back to the subject under discussion (somehow I missed the initial posts), contrarian investing means investing contrary to prevailing sentiment. In other words, investing in stocks that few people are investing in while avoiding stocks that lots of people are investing in. Ditto with factors. This is the cornerstone of my real-money strategy, and I’m up 24.5% YTD holding 15 to 20 stocks at a time (that’ll mean a CAGR of over 50% if 2016 continues along this route). My most heavily used factor is simply avgdailytot(90) with lower numbers being better (with some liquidity rules, of course). I also like investing in stocks with low turnover, i.e. vol/float.

Congratulations with your performance. I would think that you would want to divide avgdailytot(90) by market capitalization to truly consider it a contrarian strategy Otherwise I think you are just investing in SmallCaps.

Steve

[yuvaltaylor]

Very good point, Steve. I stand corrected.

I guess looking at low share turnover–volume divided by float–would be more contrarian than looking at just average daily total. There are a lot of large-cap stocks with very low share turnover. I would think that would be a good indicator of stocks that investors don’t care much about, more or less.

[PortfolioPerfection]

And this is what it looks like if you only select the best 3 stocks. Recently it could only find one stock - MO.

What’s the ranking system and buy/sell rules?

[mgerstein]

I guess looking at low share turnover–volume divided by float–would be more contrarian than looking at just average daily total. There are a lot of large-cap stocks with very low share turnover. I would think that would be a good indicator of stocks that investors don’t care much about, more or less.

Not sure we can consider apathy-obscurity and contrarian as being one and the same since there are different factors that will make or break one’s investment case.

Contrarian means going against conventional wisdom; saying Mr. Market is wrong. He can be wrong on light volume. He can be wrong on heavy volume. You make or break based on your assessment that he is, indeed, wrong.

With low volume or low dollars traded, the key is that Mr. Market isn’t acting on whatever opinion he has, good, bad or neutral.That could be due to liquidity (the issue is too small for it to be productive for institutions to consider it), preoccupation with more exciting themes, governance issues (e.g., it would trade well if the company didn’t have a weird stock class structure that disenfranchises public shareholders), etc., etc. etc. One key to success in this strategy is, obviously, getting the right opinion/analysis of the stock. So your opinion could be completely in line with the opinions of everyone else, but you may be better able for “policy” reasons to act on it (i.e. for example, managers of $100 billion funds agree with you but they can’t buy as part of their day jobs; but they can and do buy retail sized stakes as part of their personal accounts). But here, there’s also a step two: you could be right about the stock but get hurt because it can’t be readily traded at reasonable prices (or wrong about the stock but lucky because the one on the other side of your trade couldn’t get it done at reasonable prices).