I’m a proud contrarian investor. So was my father, Irving Weiss.
I began my career when I founded this company over four decades ago. He began his four decades before that.
And from our combined experience, I can tell you flatly: Contrarian investing is the ONLY way to make serious money in 2012.
If you follow the crowd, chances are you’ll lose; if you buck the crowd, the odds of winning will be greatly tilted in your favor.
And even if I’m just half-way right about what 2012 will bring, contrarian investing could give you the opportunity for one of the greatest winning years ever.
Myth #1: “Contrarian investors are perma-bears — always seeking to make money by betting on a market decline.”
The truth: Yes, contrarians do seek to make money when stocks go down. But they aim to make even more money when stocks go up.
For example, the Dow was not far from its lowest levels of the Great Depression, nearly all other investors were literally scared to death of stocks. But that’s precisely when my father bought blue chips with both hands.
As he told you himself posthumously in “Triumph of Contrarian Investing“, he bought thousands of shares of General Motors, General Electric, Sears Roebuck and AT&T.
So last week, we searched through his library and dug up the old stock charts he used in subsequent years. We discovered that, on that fateful 3rd day of March, 1933 …
He paid $5 per share for General Motors, the world’s largest manufacturer of motor vehicles at the time — 11 cents on the dollar compared to GM’s 1929 peak.
Sure enough, the stock surged to $38½ per share by 1936 … to $60 per share by 1952, and … if you factor in the many stock splits over the years … to the equivalent of $872 per share by the end of the century, paying consistently rich dividends along the way.
For Sears Roebuck, the world’s leading mail order company and largest retail distributor of general merchandise, he paid $3 per share, or just 6 cents on the dollar.
It surged to $25¼ … $49½ … $60 … and, ultimately to the equivalent of $1,458 per share, while ALSO paying nice dividends year after year.
And for the world’s largest manufacturer of electrical equipment and appliances — General Electric — he paid $10 and a fraction, only about 10 cents on the dollar compared to its 1929 peak.
Result: It surged to $30, then to $64¼, and ultimately to the equivalent of $1,739 per share by the end of the century.
In the 1930s, Dad and his associates also bought:
• silver when it was selling for 17 cents per ounce …
• one-ounce gold coins for $20 …
• shares in Dome Mining and Homestake for a tiny, minuscule fraction of their current value, and …
• the nation’s largest electric utilities for mere pennies on the dollar.
Or consider these more recent examples:
In 2001, when nearly all investors were very negative on stocks, our Weiss Ratings launched its first stock ratings.
At that time, if you had invested equal amounts in the 15 stocks we rated “A” and simply held them until December 31, 2010, you would have nearly tripled your money, beating the S&P 500 by nearly five to one.
In 2009, long after the banking crisis had struck in full force, Wall Street finally decided it was time to dump financial stocks.
But that’s also when Weiss Ratings identified the few strong banks and insurance companies in the United States.
If you had bought their shares, you could have made 238% in State Street Bank, 240% in Wilmington Savings, 275% in Jackson National Life, 320% in Metropolitan Life, 595% in National Union Fire Insurance, and a whopping 815% in Hartford Life.
All in less than 14 months. And all with stocks that we identified as the cream of the cream!
Myth #2: “To buy bargains, you have to wait for a big bear market.”
The truth: Yes, profit bonanzas for contrarian investors are more abundant after a market collapse. But long before the broad market hits bottom, thousands of stocks fall to bargain levels, and hundreds are very solid companies.
Never forget: Last year, the S&P 500 was absolutely flat! What does that really mean? By definition, it implies that …
For every stock that has surged to lofty heights, there is probably another stock that has plunged to profound depths.
Like in 2008, we’ve already seen a plunge in global bank stocks, certain commodity stocks, plus other key sectors. And some have even fallen to near their 2009 lows.
That doesn’t necessarily mean it’s already time to start buying them with both hands. But it does show you how key sectors can fall, hit bottom and be great bargains a lot sooner than the broader market.
In other words, to be a successful contrarian investor, you don’t have to wait for the “big bottom.”
You don’t even have to wait for a bear market: Even in the greatest bull markets, hundreds of stocks are often beaten down to bargain levels.
Myth #3: “Contrarian investing is a radical theory. The world’s most successful investors don’t believe in it.”
The truth: Contrarian investing is the core principal behind VALUE investing, arguably one of the most consistently successful approaches to the market of the last half century.
Many people have heard of value investing. But most don’t know much about its true roots. The fact is, though, if you follow the historical sequence of events, you’ll see that …
Bernard Baruch was among the first to establish the basic ground rules for contrarians — plus many of the basic principles of value investing — in the early 1900s.
He was an icon of rugged independence and individualism. He preached an objective, unemotional, fact-intensive financial analysis. He stressed sticking to areas which you know. And he was among the first to stress the importance of selling.
In this own words …
“The main purpose of the stock market is to make fools of as many men as possible.”
“I made my money by selling too soon.”
“I never lost money by turning a profit.”
And above all: “Never follow the crowd!”
Benjamin Graham, widely recognized as the father of financial analysis, based his approach largely on Baruch’s philosophy: He advocated investing defensively, buying stocks beaten down to price levels well below their book value, while paying close attention to their financial stability.
Warren Buffett was Graham’s student, and he obviously learned his lessons well — seeking stocks selling at a discount, below their intrinsic value.
Clearly that’s rarely possible without a strong measure of contrarian investing — finding stocks the crowd is selling, or at least ignoring.
Peter Lynch applied essentially the same principles, while popularizing Baruch’s concept of investing in what you know.
Result: He helped build the once-obscure Magellan Fund from $18 million to $14 billion in assets.
Also among the top contrarians of our day are Jim Rogers, John Templeton, and George Soros.
Over the years, however, the original wisdom of contrarian investing has often been diluted and distorted.
Irving Weiss, my father, who worked with Bernard Baruch personally, explained it this way:
“Modern-day value investors do a great job of identifying what to buy. But they often seem to lose sight of the all-important second half of the equation — when to sell.
“They’ll do just fine as long as the economy is enjoying a long-term growth cycle, such as the half century after World War II.
“But as soon as the country sinks into a long period of stagnation or contraction, they could get stuck with their stocks and lose half their money or more.
“It’s only the true contrarian investors — with no bias toward buying or selling — who will thrive equally in both good times and bad.”
I agree, and I trust you do as well.
Good luck and God bless!
Martin D. Weiss Ph.D.
Money and Markets
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