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Business Finance Investing

Contrarian Investing: Slaughtering the Herd. Part 2

One thing to keep in mind is that when an asset class falls off a cliff, it typically falls below it’s actual intristic value typically takes a long time to find it’s way back into mainstream investing.  This is because after tanking, a stock goes unloved, rejected and even ignored; for hurting so many people.  After all, who would want to invest into something that just lost 80% in value??  This is where US real estate is at.  Americans despise it.  However, much of the real estate activity going on in America nowadays involves Canadian investors.  They for the past 12 years, have done nothing but made money in real estate.  By contrast, as of March 2012, over 25% of Americans are still underwater on their mortgages.  What do you think the likelihood is that they will purchase an investment property??

Traders Work At The Chicago Board Of Trade...Traders work in the S&P 500 pit on the floor of the CME Group's Chicago Board of Trade moments after a U.S. Federal Reserve Federal Open Market Committee (FOMC) meeting in Chicago, Illinois, U.S., on Wednesday, Jan. 26, 2011. U.S. stocks rose, sending the Dow Jones Industrial Average above 12,000 for the first time since June 2008, after the Federal Reserve maintained stimulus measures and new-home sales topped projections. Photographer: Tim Boyle/Bloomberg

So there it US real estate sits, slowly depreciating in value, everyone cursing their home.  Now, a contrarian investor may look at it and start researching the asset, ensure the fundamentals are strong and start investing.  Many people consider this the “smart money”, but this smart money must be patient since many of these assets can go unloved for many years.  In my opinion, US real estate is a great buy and would be an excellent long term hold.  But once again patience is key.

Let’s look at another example that has recently found it’s way back into mainstream media and taken off again.  Here is a graph showing historical gold prices:

Now from the graph above, you can see that gold has had a tremendous run in the last decade.  However, would you feel comfortable purchasing gold right now.  Although I think that the fundamentals for gold are strong, I am now on the sidelines, just recently selling my gold futures.  One of the main reasons I sold my gold stocks was because of the next graph:

The above graph is a chart that compares the cost of average houses with the price of gold in ounces (effectively, how many ounces does it tke to buy a house).  And from the graph, the last time real estate was so undervalued (in relation to gold) was in 1980.

Two things were happening:

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  1.   Gold was overvalued, and/or
  2.   Houses were undervalued

Well in 1980, both were true: gold prices collapsed while housing prices steadily increased in value.

Therefore, had you been a regular investor or greater fool, and bought gold in 1980, you would have had to wait a full 25 years to just break even.  However, had you purchased real estate during this time, you would have made money hand over fist.  I think that we are at the same fork in the road, only 30 years later.  However, this time, with the amount of money that the Federal Reserve has printed in recent years, gold looks a lot less risky.  However, purchasing an asset at the peak of a bull market may result in some potential profit buy selling to a greater fool.  However, buying while an asset is in a slump is the only guaranteed way to ensure large returns for a fraction of the risk.  So the question is are you a contrarian investor??

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Business Finance Investing

Contrarian Investing: Slaughtering the Herd

The situation is common and usually happens every couple of years.  An asset class (stocks or real estate) rises in value: first doubles, then triples, then quadruples.  And although we have seen the devastation of these asset bubbles after they explode, many of us still make the same mistakes.  Recent events, such as the US Real Estate Bubble (2007), Uranium Bubble (2007), Oil Bubble (2007), or the Dot Com Bubble (2000), will do very little to remind the general population of financial bubbles.  However, you can go back to the 1920’s Stock Market Bubble (1929), or even as far back as the Tulip Bubble (1637), these are not a new phenomenon.

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With history on our side, we can see that since money was created, people often overvalue many asset classes; often with severe financial consequences.  This ultimately leads me to believe that most people are financially limited and as a result, stand to make the same mistakes over and over again.  Parents do not educate their children and hence, stand to repeat the exact same mistakes as the parents made.  However, this also means that some, a small percentage, stand to make a lot of money from the herd which got slaughtered.

Let’s start off by showing a chart of the stock bubble of the 1920’s and the 2000 dot com bubble:

As you can see from the two charts above, the similarities between the two events are unmistakable even though over 70 years separates them.  This is because in both circumstances, the assets were traded with emotion rather than value in mind.  One difference between the two charts is that the Dow recovered fairly quickly from it’s collapse while the Nasdaq has yet to recover and very well, many never recover.  We should also note that regardless of the asset class, the shape of an asset bubble is very similar.  And once the price goes exponential and turns the curve from horizontal to vertical, a crash is imminent.

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Now just as everyone and their dog were taking out loans and buying stocks in the late 1920’s to buy stocks so did people in the late 1990’s.  In both scenarios, people with little investing experience were buying at the peak of the mania, and with borrowed money.  A contrarian investor however, would probably look at the escalation of the asset and consider that it is too risky to invest.

Unless the financial fundamentals can support the asset escalation, it is best to stand aside and let the greater fools duke it out.  The contrarian would put that stock on the back burner and watch what it does.  Then, when the proverbial “shit hits the fan”, he can think about purchasing the asset.

Resources:

 

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Business Finance Investing

College Debt – Is It Really Worth It?

College debt is a major problem in North America. In 2010, the average student loan in North America has surpassed the $25,000 mark.  American students alone have a combined student loan of approximately $1,000,000,000,000 dollars.  But in reality,  $25,000 of student debt is quite manageable; however, what is disturbing is why it takes the average post graduate over 7 years for students to pay off their student loans. I think there is something else lurking in the background here.  Fact is, students just do not learn how to manage money and as a consequence, have trouble paying off their debt or saving money for their schooling.   However, there are three things you can do to prevent or eliminate your student loans, including:

Don’t accumulate any student loans

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The easiest way to not have a student loan is to save up for school and pay for it before actually going to school.  However, the problem with this is that it actually you to save money – and very few young people have been taught to save money.  In my honest opinion, this method is the way to go.  Working before going to school will help you appreciate actually going back to school and show you how little money you earn if you do not go to school.  Also, you will mature tremendously by being exposed to many different people in the workforce.

The trick to this is that you actually need to save money, if you don’t do this, you’ll never get to go back to school.  This requires self-sacrifice and ensuring you do not get tempted to get that new iPhone, mountain bike or high heels if you’re a chick.  Before I went to school, I worked for two and a half years and had amassed $32,000 for school.  However, I still took out student loans but only had about $12,000 after I graduated.  I paid it off about a year after I finished school.

Don’t buy what you don’t need

One of the hardest things to do is to resist the urge to buy things that you do not need.  However, that is exactly what needs to happen if you need to do in order to save money to accumulate the money for school.  In an age where teenagers want everything, it is very hard to resist the temptations of the products and services and the social pressures from friends and sometimes family.  However, learning to resist what you don’t need is needed to for you to succeed.  But this doesn’t mean just saving money for school but also for a person to build their character.

Don’t get a useless degree

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There is something to be said about somebody that has passion for what they do – it is definitely important.  But, in this world, unfortunately, money is also very important.  You need it for almost everything you consume or do.  So while it would be nice to be an actress, there aren’t a lot of people that make money doing it.  For the one you see on TV, there were 15,000 that were turned down.  That can be said for other “careers” like hockey player, marine biologist, fashion designer, psychologists, artists, etc.  There just aren’t many people that make money on them.  Be focussed on what you want to do and complete as much research, including asking yourself: What kind of job it is in the beginning of your career and near the end.  What does a typical graduate start at and what is their mid-career pay?  Many of the careers that are listed above sound interesting but can end up just giving you a lot of student debt.

Bottom line is that some of the debt that has been accumulated by students could have been prevented if they had a clear goal about what they wanted to go to school for.  However, since many young people are unsure, they take courses that they either do not finish or change half-way through their degree.   You will pay yourself dividends by ensuring that the program or degree you take is high in demand, pays well and makes you feel satisfied.