Welcome to Part Two of our four-part series on the world’s top investing strategies.
In Part One, we dug into the strategy of value investing as pioneered by Benjamin Graham, Charlie Munger, and the ‘Oracle of Omaha’ Warren Buffett.
It’s a strategy that’s made Buffett billions…and Berkshire Hathaway into one of the most dominant investing conglomerates ever.
If you haven’t read it yet and would like to, you can check it out here.
Today, we’ll investigate a different approach that’s just that — different.
I’m talking about Contrarian Investing.
The trick to investing this way is to go against the grain. To go against the flow. To buy when most are selling…and sell when most are buying.
But if you can master it, you could find yourself sitting pretty…when everyone else watches their portfolios disintegrate.
Few investors know this feeling better than Sir John Templeton of the Templeton Growth Fund.
Sir John Templeton
Born in 1912, John Templeton grew up in the United States. He attended Yale University during the first few years of the Great Depression.
While most people were liquidating their assets, Templeton decided to swim upstream. He bought 100 shares of each company on the New York Stock Exchange that traded under a dollar.
At the time, that was 104 companies.
It was a wildly contrarian bet…to put money on the future in the middle of the worst economic era in the United States’ history.
But Templeton thought it prudent…and he was proven right in the years that followed as the economy recovered.
And then, to really befuddle commentators, he did it again!
On the day that World War II began, Templeton called up his stockbroker and instructed him to buy every single stock trading under a dollar.
It made him a billionaire.
He started his Templeton Growth Fund in the mid-50s to employ this strategy at an institutional level. It later became Franklin Templeton Investments…a company which currently manages over half a trillion dollars.
In an article written in USA Today in 2007, Franklin Templeton’s stock [NYSA:BEN] was rated the number-one stock pick over the past 25 years based on returns…claiming that it had generated 64,224% since 1982.
In other words, a $15k investment in 1982 would have turned into almost $10 million by 2007.
The strategy simply works. And here’s how Templeton broke it down…
He avoided the herd and bought when there’s blood in the streets. He chose to take profits (sell) when values and expectations are high.
He didn’t bother much with investigating individual companies. Instead, he focused on taking advantage of the ‘reversion to the mean’ concept…better known by the phrase, ‘What goes up must come down.’ [openx slug=inpost]
Marc Faber is a Swiss investor who also happens to be a professional skier.
He often goes by the name ‘Dr Doom’.
He became famous for his ‘perma-bear’ mentality, especially towards the US economy. That being said, Faber made several correct predictions ahead of the 1987 crisis, the dot-com bubble and in the recovery that followed the Great Financial Crisis in 2007.
He also recommended investing in China decades before they were a serious economic contender.
Much of his contrarian investments were dropped into Asia and emerging markets like Russia, Paraguay and Uruguay.
When’s the last time you heard someone betting on Paraguay?
Unlike Templeton, Faber’s strategy focuses on the ignored opportunities rather than the disliked opportunities.
In other words, when everyone is pouring money into the US stock market, Faber’s instinct is to back up and look at the places that nobody ever talks about…because they could steal the spotlight tomorrow.
His guiding philosophy is that ‘many shall be restored that are now fallen and many shall fall that are now in honour.’
This philosophy derives directly from the economic school of thought that Faber adheres to called Austrian economics. In this ideology, economics works in cycles. There are booms…then there are busts.
Today, we’re a decade-deep into one of the longest booms in history…so Faber’s calling for rain.
His move? Put 25% into gold bullion. If stocks tumble, gold could be your life raft.
Another investor in the Austrian school is Jim Rogers.
He’s a wealthy American investor worth somewhere in the $300 million department. Rogers is most famous for co-founding the Quantum Fund alongside George Soros.
Like Warren Buffett, Rogers showed signs of an entrepreneurial spirit early in his childhood…selling peanuts at baseball games and picking up empty bottles after everyone left…at the age of five.
After going to Yale and Oxford, Rogers went to Wall Street and learned the industry.
When he and Soros joined forces, they founded the Quantum Fund and watched as the portfolio gained 4,200% between 1970 and 1980 while the S&P advanced just 47% in the same period.
After 1980, Rogers went on a 30-year adventure riding motorcycles around the world with his wife, picking up Guinness Book of World Records achievements along the way.
But he never stopped investing.
In 2007, he packed up shop, sold his $16 million mansion in New York City and moved to Singapore. He said, ‘If you were smart in 1807 you moved to London, if you were smart in 1907 you moved to New York City, and if you are smart in 2007 you move to Asia.’
Here’s how Rogers summarised his investing approach in his book, A Gift to My Children: A Father’s Lessons for Life and Investing:
‘Most investors look only to strong markets. If you want to invest, look for the bear market. Many have frequently profited by investing where no one else saw potential – putting money into commodities in 1998, for example.
‘By 1998, my research indicated that a commodities era was approaching and very few people noticed that the long downturn in the commodities market had severely limited supply. You can be rich if you have the courage to buy something while it is still under the radar of conventional wisdom.
‘Sometimes, the more ridiculous an investment sounds to other people, the better the chances that it will yield a profit. It is difficult not to run with the herd. But the truth is that most long-term success stories are written by folks who have done exactly that.’
On the contrary…
Contrarian investing is a popular strategy not because it’s easy.
It’s definitely not easy.
But it can be profitable…as seen with the wealthy investors mentioned above.
It takes a high level of confidence and determination to make bets against the mainstream…to sell when all of your friends and colleagues are buying out the wazoo.
If you look out the window in New Zealand, what do you see?
Do you see people climbing over one another to buy up certain assets because it feels like it’s the opportunity of a lifetime? That they need to get themselves on the ladder ASAP?
If you do, what do you think a contrarian investor would do?
I’d guess that Rogers would short it, Faber would look elsewhere, and Templeton would wait for the crash before buying up.
Editor, Money Morning New Zealand
PS: Part III coming out soon.In that briefing, I’ll jump into growth investing. That’s where you invest early into small companies…and it’s the strategy that most of the ‘new wealth’ employed to achieve their millionaire/billionaire status. Keep an eye out!