The Contrary Opinion Forum
By Timothy Lutts, Chief Investment Strategist and Editor of Cabot Stock of the Month Report
From Cabot Wealth Advisory10/19/09 Sign up for free Cabot Wealth Advisory e-newsletter
Today I'm going to write about contrary investing, the practice of paying attention to the sentiment of the masses ... and leaning the other way.
Twenty-three years ago, I attended my first Contrary Opinion Forum, an annual gathering of independent-minded investors (both individuals and professionals) in Vergennes, Vermont. I was one of the youngest people in the room, and I took copious notes, intent on capturing the wisdom from the white-haired veterans who spoke.
I've returned every year since, with the exception of one, and now some of my own hairs are white.
More important, I now know that those guys up at the podium don't have all the answers.
So why do I go? To get ideas, to meet old friends, to get out of the daily routine, to see some beautiful Vermont foliage ... and to get a read on the consensus opinion. More on that below.
As for those speakers, this year they included Michael Aronstein, David Hale, Alan Shaw, Louise Yamada, Hugh Johnson, Robin Carpenter, Bill McVay, Karel Samsom, Charles Blatteis, Dean LeBaron, Walter Deemer, Mark Ungewitter and Kathryn Welling.
I'm not going to go into the details of their presentations; if you're really interested, come next year and you can see me, too. But I will say this--the speakers tend to be of two camps, fundamentalists and technicians.
The fundamentalists say things like this:
"Back in the 1920s the excess was in stocks; In the 1990s the real excess was in housing and credit. So the recovery from the latest big crash will be very different from the recovery from the earlier big crash. In the years ahead, the real estate and housing industries will continue to be troubled, while the stock market will do just fine. ... The trouble is, the Federal government is now assuming an increasing debt load, and people support that. Eventually, the U.S. will default on its debt ... but that's years away."
"Over the next five years, your best investment opportunities will come from emerging markets. There are 8,300 banks in the U.S. and 7,000 of these banks have less than $1 billion in assets ... much of it in commercial real estate, which will cause trouble in the year ahead. In Germany, the majority of banks are owned by the state, and that will cause trouble. Back in the U.S., states are having trouble; many will begin selling assets to raise cash ... airports, highways, state houses."
"The fact that the U.S. government has failed to put anyone in jail for this financial collapse is troubling. The FBI has been focused on terrorism. Our courts are overloaded. Our prisons are overloaded. And many of the people responsible for this collapse are expecting to get big bonuses this year."
"Thirty-five percent of mortgaged property in the U.S. is upside down. Fifteen million homeowners are at risk. The average retirement account is down 27%. As result, people don't feel wealthy. And if people don't feel wealthy, they won't spend money, which means the recovery will falter."
And most memorably ... "Based on the historical evidence, we are likely to experience either painful debt deflation or highly destructive monetary inflation--and perhaps both at the same time."
The technicians say things like this:
"I see parallels between the charts of 1907 and 2008."
"Gold is in a long-term uptrend. In fact, it's our favorite asset class."
"A cyclical bear market has begun. The next bull market will begin in 2018."
"Most sectors are extended now, but I see a good long-term base in technology stocks."
And then they all get together for drinks and dinner, discussing what they just heard, offering their own projections/prescriptions for the weeks/months/years ahead and, in general, sharing opinions.
Because when you get right down to it, that's what these are. Opinions.
And as the quote on the mantel beside my desk says, "Markets are never wrong; Opinions are."
Now, I'll admit, I've been guilty of expressing opinions, too. There's nothing wrong with sharing ideas. When it comes to investing, however, I much prefer to simply listen to the market carefully and act accordingly.
But here's a funny thing.
The name of the forum, as I said at the start, is the Contrary Opinion Forum. The gathering was begun 47 years ago by the Vermont Ruminator, Humphrey Neill, an investor/philosopher who honed the craft of Contrary Opinion for decades and wrote "The Art of Contrary Thinking" in 1954. (My father, Cabot's founder, was an attendee for decades.) Humphrey's disciple Jim Fraser, founder of Fraser Management Associates, carried on the tradition, while publishing "The Contrary Investor Newsletter," and today the forum continues, hosted by Alex Seagle, the current President of Fraser, who, if not a true contrarian, has the good sense to keep a great tradition going.
But the folks who attend, as a whole, are not contrarians! And I say this from experience. At market bottoms, they are pessimistic. (At last year's forum they were shell-shocked; no one had foreseen the implosion of the financial sector.) At market tops, they are optimistic. And in recessionary times, they foresee difficulties exiting the recession. They watch the same news stories as ost investors, and read the same statistics, and while they can certainly be creative in their thinking,
they tend to reside in the same place, sentiment-wise (on average), as the average investor!
So when I go to the forum--and this is a habit my father taught me--I categorize each speaker as a bull or bear, count the totals at the end, and then resolve to act contrarily to their consensus sentiment.
This year, the tally was four bulls to six-and-a-half bears, which makes me feel good.
Also, I got a good quote. "You can only see as far as your headlights ... but you can make the whole trip that way." E. L. Doctorow wrote that, but he didn't attend.
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