A true contrarian look at investing and at life in general.

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Updated @ 9:45 p.m. EST, Sunday, November 9, 2008.


WELCOME TO TRUE CONTRARIAN! I will attempt to create an entertaining, readable, and hopefully refreshing viewpoint a few times each month. Each issue will feature my intermediate-term financial outlook, my long-term financial outlook, and a personal reminiscence.

If you want to buy low and sell high, first you have to buy low! --Steven Jon Kaplan

NOW IS THE TIME TO BUY LOW, ESPECIALLY COMMODITY SHARES (November 9, 2008): It is ironic that the investing public talks about buying low and selling high--but everyone instead likes to buy at multi-decade peaks and is afraid to buy at multi-decade lows. No wonder the vast majority of investors lose money in the stock market even with the strong long-term upward bias for global equities. Meanwhile, corporate insiders were heavy sellers a year ago, and have been equally aggressive buyers in recent weeks. It's hardly surprising that the rich get richer and the poor get poorer.

The following statement is cynical but true: the financial markets exist to transfer money from the middle classes to the upper classes. Wealthy people train themselves to buy when the media and the public are most gloomy, and to sell when the prevailing sentiment is either euphoric (as in early 2000) or irrationally complacent (as in late 2007).

Commodity shares in particular have rarely been more undervalued than they have been in recent weeks. Gold mining shares traded at the same levels in late October 2008 as when gold had been $328 per ounce in 2002. Energy shares traded at the same prices a couple of weeks ago as when crude oil was $28 per barrel in 2003. Every single major coal producer saw heavy insider buying by top executives during the past several weeks. Agricultural-commodity shares slumped to five- and six-year lows while the price/earnings ratios of many of these companies reached all-time nadirs.

Numerous other major asset classes slumped to multi-year and even multi-decade bottoms. High-yield corporate bonds, or "junk bonds", plummeted to their lowest valuations since 1933--an amazing 75-year low. Convertible bonds, preferred shares, and similar groups also became absurdly oversold. Japan's Nikkei index fell to its lowest point since October 1982--not only marking a 26-year nadir, but showing a far more ridiculous undervaluation since corporate profits in Japan, especially for small companies, have soared since 1982. With global liquidity at a multi-decade low and hedge funds forced to dump assets left and right, profitability and rationality has been completely ignored.

While global equity markets have been forming a bullish pattern of higher lows, the average investor feels emotionally that they are making lower lows. This is a classic sign of a major bottom and a strong buy signal.

If there is any doubt about whether stock markets around the world will rebound sharply, all you have to do is look at a chart of TLT, which is a fund of U.S. Treasuries averaging 25 years to maturity. As a general rule, the vast majority of Treasury traders are the world's most knowledgeable global investors. TLT has been forming a bearish pattern of lower highs for several weeks, meaning that the smartest asset allocators are positioning themselves for an environment of global economic expansion and sharply higher inflation, along with a weaker U.S. dollar. This is the exact opposite of the media's insistence on "deflationary depression" that is as dead wrong as the media's bullish Goldilocks outlook on the stock market a year ago, or their equally foolish "buy commodities" mantra a half year ago.

  • Overview of Gold Mining Shares, updated substantially on November 9, 2008 to show precisely how precious metals shares have completed important six-year bottoms.
  • Learn more about Steven Jon Kaplan and watch a live interview on MarketWatch.
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    CONTINUE TO ACCUMULATE EQUITIES ON ALL PULLBACKS, ESPECIALLY GOLD-MINING SHARES AND OTHER COMMODITY PRODUCERS (October 19, 2008): It is likely that many global equities completed important five-year bottoms on October 10, 2008 which were confirmed on October 16, 2008. Numerous closed-end mutual funds, which can trade at a discount or premium to their net asset values, showed all-time record high discounts that exceeded 20% for the majority of funds for the first time ever, and were greater than 30% for many closed-end funds. This shows a multi-decade aversion to equities by amateur investors, while professionals and insiders have rarely been more eagerly and intensively buying.

    The volatility index VXO reached a peak of 103.41 on October 10, 2008, which marked its highest level since October 1987. VIX, another important index of implied volatility which includes out-of-the-money options, reached an all-time record high of 81.17 on October 16, 2008. Whenever investors are so afraid of an additional pullback that they will blatantly overpay for portfolio insurance, it must be the case that global stock markets are set for a powerful rally that will likely continue for roughly one year.

    Investors are far underestimating the stimulative impact of concerted central-bank rate cuts worldwide. Since so many countries sharply raised rates during the past year to fight transient commodity inflation, they can now cut rates aggressively--and are already doing so to combat the global economic contraction. Rising unemployment is a far greater political risk than rising inflation, so politicians will be especially eager to lower rates as much as possible. This will result in negative real interest rates in many countries, which will strongly dissuade investors from favoring time deposits and will encourage equity accumulation.

    Commodity shares, especially gold mining shares, have become among the most irrationally oversold and undervalued sectors in the financial markets. The ratio of any given basket of gold mining shares to the price of gold is at half its mean historic level, meaning that even if the gold price is unchanged at some point in 2009, gold mining shares will on average double in value as these respective ratios inevitably regress to the mean. Should gold move back above $1000 per troy ounce at some point in 2009, as is likely given its normal historic volatility, funds of gold mining shares such as GDX and ASA will triple from Friday's closing prices.

    Energy shares have also become deeply oversold, with coal mining among the most absurdly oversold subsectors which will likely double or even triple before the end of 2009.

    As a result of five-year lows for many sectors, and multi-decade lows for numerous closed-end funds, I have been heavily accumulating numerous equity funds. Go to the "current asset allocation" near the bottom of this page to see my current portfolio.

    Those who are new to this web site should click on the "Back Issue List" in the upper right corner of this page. You will see that I had over half of my net worth in short positions for the final weeks of 2007 and for the first three quarters of 2008, with a heavy new short position added on August 15, 2008. Therefore, I have shifted from being massively short equities to being even more heavily invested on the long side mostly during the first half of October 2008.

    FINALLY, A SINCERE THANK YOU to Barron's for featuring me on page 50 of their November 19, 2007 issue, and then again on February 25, 2008 (page M14) and June 2, 2008 (page 41), as well as August 25, 2008 (page 32).

    CURRENT ASSET ALLOCATION (November 9, 2008): My own personal funds are currently allocated as follows: LONG POSITIONS: stable value fund (retirement fund with stable principal paying variable interest, currently 4.50%), 0%; MYJ, 2.5%; Gold mining funds GDX, ASA, BGEIX, INIVX, 40.5%; Japanese smallcap funds DFJ, SCJ, JSC, JOF, SPJSX, 12%; Coal mining fund KOL, 6.5%; Energy closed-end fund PEO, 7.7%; General-equity closed-end funds ADX, CET, 5.5%; VWEHX, 0.5%; VIDMX, 10.5%; VINIX, 1%; VIEIX, 1%; TRBCX, 1%; VZ, 1%; KRE, 1%; XRT, 0.5%; TOC, 1.7% (bought at a 15% discount); gold and silver coins and related metals collectibles, 6%; other collectibles, 0.5%; cash and cash equivalents including VMSXX and the PayPal money-market fund, 0.6%; SHORT POSITIONS: None; covered ALL of them in October 2008 which had amounted to just over half of my entire net worth.

    REMINISCENCE OF THE WEEK (November 9, 2008): I was invited to be the featured speaker at a financial conference in Costa Rica near the end of 2007. Among other amazing activities, about a dozen of us rode horseback on the beach by the Pacific Ocean just south of the city of Jaco. We were trotting along in a leisurely fashion, when suddenly one woman and her horse started flying down a small side road at about 30 miles per hour (48 kph)! We were startled and afraid, since she was less than a half minute away from intersecting the main coastal highway with its cars and trucks surging at twice that speed. Fortunately, the manager of the equestrian club was able to coax his own horse to accelerate rapidly enough to overtake the runaway steed and to push the wayward animal into a ditch just a few seconds before both had reached the highway--with only minor injuries to all involved. We later discovered that this woman's stallion was a retired racehorse that had not run at such speeds for several months--but which must have gone through a middle-aged crisis and wanted to regain its lost youth.

  • Best of Previous Reminiscences
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