Being Contrarian

NEW YORK - SEPTEMBER 15:  A trader works on th...

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I remember my speculative markets professor at Wharton used to say that you can’t make money doing the same thing everyone else is doing. That made sense to me and I’ve had a contrarian bent ever since. My friend Howard (happy birthday Howard) likes to buy stocks making all-time highs. It’s a tried and true methodology and it works well for him and that approach was the basis for Howard’s Wallstrip show.

But I’ve never been able to get my head around doing the same thing everyone else does. You have to invest in a way that makes sense to you. One of the comments I got on my google post last week (i think it came via email because I can’t find it and quote from it) suggested that you can’t make money being long in this market, that this is a time to be making money on the short side. But I’ve never shorted stocks and I am not going to start now.

When I look at the carnage in the markets (the DOW is down 9% in the past 30 days), I think that I should buy something. And the thing I’ve got my eye on is google for all the reasons I outlined in that post. If it gets to $400, and it just might happen with another day like today, I will start buying.

The way I look at it, things are bad out there, particularly for financials and companies with bad balance sheets who are over-leveraged and have near term liquidity needs. You can’t buy those stocks in this environment. But there are plenty of companies out there with stock prices 10-15% lower than they were a month ago where the fundamentals of the business haven’t changed. And my gut says it’s time to start nibbling at them.

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Comments (Archived):

  1. jeremystein

    i think it depends on your time horizon.the contrarian view is interesting right now. indices are misleading. they NEVER go to 0. theyll just replace bad performing stocks with better ones. it cant be a short sellers game forever.

  2. Jeff DiStanlo

    I highly suggest $kol $ico $anr. Coal prices are double jan 2008 and coal equities are below those levels. Upgrades by analysts who don’t understand how higher earnings based on higher prices are not getting picked up in the equities. The baby is being thrown away with the bath water. Here is a chart of the broad sector ETF and one of the price of coal (red and blue lines are the appropriate price for those firms).

    1. Graham Siener

      Hooray, let’s support coal! Can you throw in some oil and maybe gmo engineering just to round things out?When will we attach a cost to the “inconvenience” of the environment? Forget renewable energy, we’d need a lot less coal if we were smarter about our behaviors and efficiency.

  3. andyswan

    Don’t forget to look at selling insurance to the fearful masses *after* the storm via those 400 puts!

    1. McLarty

      Love that metaphor for how EXACTLY to short puts! Green trade every time.

  4. Jamie Lin

    I guess basing your willingness to pay on a psychological price point is also quite of a contrarian approach as everyone else is basing on one more more industry average multiples…

  5. mkamdar

    “But there are plenty of companies out there with stock prices 10-15% lower than they were a month ago where the fundamentals of the business haven’t changed.”Right, but on what basis do you claim that the prices from a month ago were accurate and the prices down 10-15% today are inaccurate?

    1. fredwilson

      good point and that’s the work you need to do in this market. i am a fan of cash flow multiples over growth rates as a way to find value.

  6. rahmin

    while $GOOG is down nearly 40% YTD, $AAPL is in the same camp… anyone out there becoming a buy on $AAPL at 125?

    1. fredwilson

      did you see steve jobs at the last event?

      1. rahmin

        I did… still looking a bit thin to you?

  7. howardlindzon

    thx frined. you are a great friend and mentor.

    1. fredwilson

      it goes both ways as you know well Howard

  8. WayneMulligan

    “Margin of Safety” — words to live by in markets like these. My boy Ben Graham, still a contrarian in most circles, nailed this principle almost 90 years ago.

  9. Soren Macbeth

    I love that people at putting the $ on their tickers in DISQUS comments! Just for that I am going to find a way to pull them into the streams 🙂

    1. anthonybrown

      That would be AWESOME! The only issue I see is the whole signal vs. noise concern. I love stocktwits, but have noticed that as its become more and more popular, its become harder and harder to follow the conversation…obviously a good problem to have!

      1. Soren Macbeth

        Indeed, signal vs. noise is a huge issues and I have a what I think are some great and unique strategies for keeping the signal ratio high which are in development right now and coming soon.

        1. gregorylent

          and there you have a start-up with that ability … see you at tc50

          1. Soren Macbeth


    2. Jeff DiStanlo

      The ultimate would be if Google Chrome would pick up on the $AAPL tagging and display that as a link to their Google finance page for that ticker. Isn’t that partly why they built a browser – to direct users to their sites? I keep trying to click on all the $tickers in twitter posts b/c now that has “meaning” rather than just text.

      1. Soren Macbeth

        That gives me a slightly different idea, which is a greasemonkey script that will turn them into hyperlinks (to of course).

      2. howardlindzon

        we are also working on that with adaptive blue and other semantic tools, but thanks for noticing. you are exactly right

  10. byrneseyeview

    Howard’s buy-at-the-high strategy is actually contrarian, in a way. When I see a stock trading at the high, I think “Never in its entire history has this company been considered so valuable. Surely, it’s more likely to revert to the mean.” Howard is basically betting against people who have this all-too-common instinct.And when a company’s value is radically increased — like when Apple stealthily turned into the world’s best consumer electronics company — all those people who think their 100% gains can’t last will be out-traded by folks who think that a 100% gain is just the beginning

    1. andyswan

      Very true. A move from $10 to an all-time high of $20 is sometimes the beginning of a run to $150! I think part of the key to the all-time highs strategy is letting winners run and protecting positions with stops that move along with the ride, but give plenty of room for volitility

    2. howardlindzon

      i wish it was that simple. my strategy has incredible volatility at the edge. you give back gains at the end of a big market run.I do love the fact that no one thinks its contrarian whch is probably why it just works.the key is when the market sucks, to be less invested, not more – at least for my comfort level.

  11. kidmercury

    gold. fred i’m assuming you’re a fairly wealthy person, gold is where it’s at if you have the money. check the chart, there is plenty of room to go. the real story behind the econ crash is the destruction of the dollar, that means commodities and precious metals will be the buying opportunities over the long run (will need to hold for a few years). gold made a big jump today, still plenty of room to go over the next few years. i would recommend trading the spot market, but if you don’t want to do that the gold ETF is another good bet, as are forex ETFs that will let you short the US dollar against another currency.also foreign currencies. for the poorer folks out there (i put myself in this category), that is easier to play with smaller amounts of money. if done properly playing these markets will let you outperform inflation and thus will give you real profits. the bailouts, especially the fannie/freddie one, will kill the dollar over the next few years, that is at the heart of the opportunity.

  12. Banet

    It’s interesting that you say the fundamentals of some companies — I assume you’re referring to Google — have not changed.The overwhelming majority of Google’s revenue comes from advertising. While I know there’s a general movement towards online advertising, there’s also a very real chance that ad budgets, online or not, will be cut drastically in there’s a hard-core recession. Banks certainly are going to be cutting back. Hotels might be. Airlines too. Consumer electroonics and other non-necessities.Apple’s another example. When money gets tight I’d think the first thing that’s cut back on would be the fancy new laptop, the much more expensive shiny iPhone or the yet another iPod to replace the 2 or 3 perfectly good, but dated looking, iPods you already have.Bottom line, I’d look into it a bit harder before saying that the fundamentals of a company “haven’t changed.”Peterhttp://www.FlashlightWorthy…Recommending books so good, they’ll keep you up past your bedtime. 😉

  13. kenberger

    Fred-Forget the whole VC, stock picking and real estate investing stuff. Great as you may be at all the above, none comes close to how prolific and multi-tasking you are at blogging.I saw you keynote today, then chatted w/ you later, yet somehow you pulled off this thoughtful post right in the middle of that timing. Didn’t see you toting a laptop. And you blog even while traveling, etc. If we could understand how you consistently pull that off, day after day, year after year, it will be the greatest gift of all.

  14. kenberger

    (disqus seems to have repeated this 3x, how to delete?)

    1. fredwilson

      As Gregory Lent said in one of his recent comments, it’s all there in thebags under my eyes

  15. kenberger

    (disqus seems to have repeated this 3x, how to delete?)

  16. Timothy Post

    The ultimate contrarian play right now is Gazprom. Gazprom is a global powerhouse. It has lost more than 50% of its market capitalization since its highs earlier this year.The ticker is OGZPY and is traded as an ADR. See the following link for more info:…The BRIC countries will emerge from this crisis well positioned to grow in the post Anglo-American era. Gazprom is the safest way to bet on that growth.

  17. Damon

    Don’t be so quick to abandon shorting. A great, simple strategy that requires shorting is to short a sector-based ETF, and use the proceeds to buy a company that you believe will outperform it’s peers.For example, short $10,000 of tech index ETF, and buy $10,000 of Google. You pocket the spread between Google and it’s peers in the index. And you don’t need to tie up any cash. (You just need to make damn sure you can cover a blown up position…)It also works in reverse. Pick a dog, go long it’s index, and short the sucker.It’s fun for the whole family.

    1. fredwilson

      Shorting requires paying close attention to the market and I don’t do that consistently. That may well be true about buying stocks in general

  18. Andy

    love this post. i agree. i am the only guy i know buying bank and insurance the last 2 days…i bought AIG at 2.05 — 5k shares — and, frankly some of these banks will survive — and its a long term play for me — so that when jpm, and ntrs come stormin’ back…..thanks FW,andy

  19. Daniel Weinreb

    I don’t understand your comment about Howard. Contrarian investing usually has more to do with buying when the price is low than buying when the price is high. Although what really matters, according to the usual theory, is simply how the price compares to the “underlying value”, completely regardless of historical prices.I’ve read a lot about contrarian investing and I am completely convinced that it’s right. (David Dremen’s book, though rather old now, was great.) I agree about shorting; that’s speculating, not investing, and I’m not going to try to bet against the full-time traders in this kind of way. And it’s too dangerous on the down side.Google does not look low compared to its earlier prices. Computing the “underlying value” or “future discounted revenue stream” of a company like Google seems impossible to me. A stock with a P/E of nearly 29 is not usually the kind of thing a contrarian investor gets excited about.

  20. Will Johnston

    So, now that GOOG is at $380.. anybody buying? I just bought a load.

    1. fredwilson

      I bought some yesterday but it was just a nibble to get started