Monday, April 13, 2009

Being Contrary to the Crowd of Contrarians.

One problem that I have been struggling with as of late, is the underlying thought that goes with my brand of contrarianism. Since the advent of the internet, it is possible to only read things that you completely agree with on a daily basis. For the purposes of this blog I will limit these readings to value investing, small government, and (un)common sense. Before the internet, you would do well to read about such things in a public library, let alone the paper or national magazines, especially if you are outside of one of the REALLY big cities like LA, Chicago, and New York... While a lot of the blogs I read (and link to) do have a vast array of thoughts, they have one thing in common: they are all pretty contrarian.

Often, it is advised to stay away from 'the crowd'-a la Gustav Le Bon. My question is 'how do we know that there are not multiple crowds in the immensely complex, yet inter-related markets that exist?'

Here are some of my observations on some issues...

Gold/Inflation: I can not see how we can print as much money as we have without there being some pretty bad currency problems. Though, I will admit that this can hypothetically be offset by the lower velocity of money coming into banks keeping the demand for goods down. Technological advances have also helped to tame rising prices in the past. However, I don't trust the government/Fed to have the discipline to 'ease' us into higher interest rates. I am not saying that it won't happen-we may get lucky.

The bottom line is that all the gold loving people out there may well have bought enough gold to create a bubble-after all, most of the price fluctuations in currency and commodity markets are based on expectations of what will be happening in the future, not what is currently happening. I'd say that it is safe to say that the gold bugs think that the end of the world is coming too... An idea that I am not convinced is without merit. With that said, I would have no problem with getting on the gold standard again-if it would be feasible.

T-Bills: After the talk of gold, it seems pretty obvious that there is a treasury bubble... If I were gonna lose sleep over something- it wouldn't be CERN, the Aztec calender predicting the end of the world in a few years, or even the commies infiltrating our power grid, it'd be our government's debt being worthless. I am not worried about a 'default', as all of our notes are redeemable in nominal denominations of our fiat currency-it's the inflation that scares me. What if Berkshire Hathaway actually had a higher credit rating than the US Government? It would be paradigm shifting.

I almost feel bad for betting against my country... almost.

Financial Institutions: While there are probably still a ton of toxic assets floating around, there may be some good values. For example, Wells Fargo is probably still undervalued... However, after reading their 10K (which was unbearably long with all the exhibits, notes, and such) I have no earthly idea of how to come up with a value in which I could be confident enough with to invest on. There is just too much low hanging fruit out there right now. Hell, at Soapstone's present price, it looks like they will be able to have NO REVENUE for around 10 quarters before they eat in to their market cap's worth of cash, less all balance sheet liabilities.

Reorganizations and bankruptcies (as are common with financials right now) are new beginnings, not the end, as is excellently pointed out in Distress Investing-a book which I am in the process of reviewing for Wiley. I wish that I understood the sector better.

Dishware: Premier Exhibitions is a company that, as my fellow value investor Ragu has stated, seems pretty cheap due to assets from the Titanic... however, I fail to understand why people (more specifically, museums) would be willing to pay so damned much money for dishware that was salvaged in the 80s (back when DayGlo was cool)! I would guess that in 100 years, people will wonder why we cared so much about a poorly designed ship that sunk; presently no one cares about Titanic's sister ship, the Lusitania. I am kinda uncomfortable with buying in, as the price that they have been quoted on said dishware is a few years old-a time in which donations to museums (the places interested in the artifacts) were a lot higher. While the cash flows of the company even without the artifacts seem to have a good future, I am still unsure-despite liking what I have read of Mark Sellers.

In conclusion: I know that I sound pretty unsure most of the examples I gave, which is by design. I am saying that I don't know! Obviously, I have not placed any money on any of the ideas- the only one that really gets me really excited is that of shorting treasuries... I am certainly not saying that any of the ideas are bad ideas, they actually make a lot of sense at the moment. I just don't get the full scope of them. This is despite all being pretty popular in the value investing/libertarianesque analyses out there.

I guess that the flaw in contrarianism is that going against the crowd can be a very daunting thing, especially when you don't know where the 'true' crowd is. After all, due to search filters and such, I can go for days without hearing anything about Efficient Market Hypothesis, GM going bankrupt, or UK's new basketball coach/savior.

Basically, it is a pretty good idea to examine everything yourself, be an individual, don't chase trends/reversals of trends, and to only do what you feel is correct and prudent-regardless of what the crowd(s) is/are doing. Knowing your limits can certainly save you a ton of money. Beware of people herding together like cattle: if you ever see me being part of said herd; please, feel free to shock me with a cattle prod.

I'm off to buy some books on bank analysis...

5 comments:

Mark said...

I'm with you on the possibility of this money printing to really kill us down the road. I opened a practice account w Forex.com to learn how to use a currency trading platform and trade them to maybe make a killing shorting the USD if that day comes.

It will probably be a lot of years down the road though. It seems like if everyone believes the Keynes way is the right way it is almost a self fulfilling prophecy it has to eventually fail. Our country is still going to be way to leveraged in 10 years and the consumer....gasoline will be $4+ very soon.
It's going to take a lot of years of 0 rates and printing to bring us out I'm afraid...to many if we have trillions in debt

Anonymous said...

I've noticed and felt the exact same way about Gold and Treasuries. Feel too many people are getting the gold bug (while Gold Standard is a totally different subject) thereby creating a bubble out of a previously good investment, and that too many people are trusting the Government to fix all this mess, which is as you pointed out, has the opportunity to create rampant inflation.

shadowstock said...

"fail to understand why people (more specifically, museums) would be willing to pay so damned much money for dishware that was salvaged in the 80s! " LOL

Outstanding commentary on all issues touched.

Thought provoking read

John

John@shadowstock.com

Taylor Conant said...

This will probably turn out to be more prophetic than intended: What if Berkshire Hathaway actually had a higher credit rating than the US Government? It would be paradigm shifting.

Though, whether the ratings matter or not, I doubt BRK will last long as a good credit when people realize the government is not because BRK, as a financial company by and large, is dependent upon the current financing paradigm created govt as the final backstop.

Have you done any recent updates to this post to share where your thinking is at on any of these topics?

Taylor Conant said...

I don't know what I thought I was trying to say below but right now I would say I was trying to say something like, "The current financing paradigm where the govt is the ultimate backstop."