Friday, June 16, 2006

Blood in the Streets

The financial news headlines say it all: “meltdown” - “sell-off” - “plunge in prices” - the words are clear on where stock values are heading and it has investors rattled. Not so the contrarian investors!
Those who follow contrarian investing strategies believe they bring much needed rationality to the otherwise emotional and temperamental market. While everyone else is mopping their brows, contrarians are calming picking through the rubble.

When asked how he became so wealthy, Meyer Rothschild, German banker, patriarch of the legendary House of Rothschild and ultimate contrarian, attributed his success to buying when “there was blood in the streets.”

Fortunately, contrarian principals apply even without bodily harm.

Anyone interested in the contrarian viewpoint might find Jim Rogers’ book, Adventure Capitalist – The Ultimate Investor’s Road Trip, an interesting read. Rogers, a contrarian investor-philosopher from Hungary, started Quantum Fund with George Soros in 1970.

Rogers, who always wore a bow tie at the office, based the book on his casual drive through a hundred-plus countries around the world between 2000 and 2003. The book is not a fast read, but Rogers tosses aside conventional thinking and gives a thumbs-down to investing in Russia and India. Instead, he picks China, Uruguay and Mongolia as preferred alternatives.

The number of contrarian funds proliferated in the U.S. in the mid-1990s, but some managers found that the word “contrarian” is commonly misinterpreted or is unfamiliar to investors. Lighthouse Contrarian Fund, which is managed by Lighthouse Capital in Houston, is now known as Lighthouse Opportunity Fund. Despite the name change its managers still “look in areas out of favor with the investing public.”

Rock Point Advisors, relative newcomer to the investment advisory scene, is another “closet contrarian.” You won’t find the word contrarian in their literature, but Rock Point promotes its managers as “independent thinkers.” A thoughtful article entitled “Looking Ahead as the Froth Settles" was featured in the Second Quarter 2006 edition of the firm’s newletter, OnPoint. The author, Mike Huffman, notes that “a decline [in the market] is always disappointing, yet it is not cause for despair….Thoughtful investors must consider how…they’de like to be invested after the downturn.”

Contrarians see only opportunity in troubled markets. So if the recent headlines have left you shaking, prescribe yourself a sip of the contrarian’s cool-aid.

More reviews of books on contrarian investing and highlights of funds using contrarian strategies can be found in my market paper “Contrarian Strategies: selecting small capitalization stocks.”

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