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A true contrarian look at investing and at life in general. |
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WELCOME TO TRUE CONTRARIAN! I began this blog in August 1996, and continue to update it periodically. In February 2006, I began a daily
update service in the style of Dow and Jones who began a similar daily update in the late 19th century. For those who wish to receive an
e-mail from me six days per week (every day except Saturday), as well as intraday updates whenever I buy or sell anything, you can subscribe
using the link below. If you prefer simply to follow this blog, it will always include a personal reminiscence at the bottom and an
introduction to my financial outlook at the top. I have removed my precise asset allocation which is now available to subscribers only.
I don't know the key to success, but the key to failure is trying to please everybody. --Bill Cosby
INVESTORS HAVE RETURNED TO PRE-RECESSION COMPLACENCY (April 24, 2011): On Wednesday, April 20, 2011, VIX slid to an early morning bottom of 14.30, its lowest level since June 21, 2007. Even after experiencing the biggest stock-market plunge since the Great Depression, investors have no fear of a repeat. Many people believe that lightning won't strike the same place twice, and that they've lived through the one severe bear market in their lifetimes. This is truly wishful thinking, since the last bear market was caused by housing bubbles in the U.S., Ireland, Spain, and several other countries, which led to the collapse of the U.S. mortgage market, and thus the bankruptcy of Lehman Brothers, leading to the inevitable chain reaction which followed. Today, we have housing bubbles in China, India, Canada, Australia, Brazil, Indonesia, Malaysia, and in most of the world's most populous countries. As those similarly collapse, we will undergo a nearly exact repeat of the last bear market for essentially all risk assets--equities, corporate bonds, commodities, real estate, art, collectibles, racehorses, and virtually everything else.
Most investors' idea of success since early 2000 has been to lose a significant portion of their net worth in the first bear market of this century, then to regain it in the subsequent bull market, and then to repeat this process a second time. We will get a third and probably a fourth repeat, and possibly a fifth. Retaining your net worth in nominal terms, which means really losing most of it because of inflation, is not the key to success; you would do far better keeping your money in "boring" bank CDs and rolling them over, with enormously less volatility. During an era of stagnation, you sometimes have to sell and wait for the next compelling buying opportunity. In this manner, you will double your money several times rather than the equivalent of putting it in a mattress. Now is one of those times when you should be selling, since you will be able to buy back your stocks at less than half price within two years, and you will be able to buy back real estate at roughly a one-third discount to current valuations in most of the United States--and at less than half the current price in most of the world including Canada and Australia.
Everyone today seems to think the U.S. dollar "will collapse", even though it has already retreated almost all the way back to its lows from 2008 and it is universally hated. I expect the U.S. dollar index to surge higher through 2013, moving back above 100 which it has not done since 2003. Whatever assets are most adored today will be the worst performers for the next two years, while the strongly disliked U.S. dollar along with long-dated U.S. Treasuries and their funds including TLT will be among the top global performers.
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LONG-DATED U.S. TREASURIES REMAIN THE SINGLE BEST CHOICE FOR 2011 (January 19, 2011): You would think that the more enduring the bull market in any asset, the more that investors would be eager to jump aboard. Currently, the longest-reigning bull market on the planet is the rally for the 30-year U.S. Treasury bond, which began in August 1981 and which will thereby celebrate its 30th birthday later this year. However, most individuals continue to disrespect this sector, with virtually zero net inflows during 2010 when practically everything from commodities to equities to corporate bonds to almost every possible alternative choice enjoyed strong or even record net inflows around the world.
During the past six weeks, the yield on the 30-year U.S. Treasury bond frequently exceeded 4.5%, which by itself is far above the returns of nearly all other assets with equal or lesser risk. The yield spread between the 30-year and 2-year U.S. Treasuries set an all-time record during the past week, as investors are irrationally willing to lend money in the relatively short term for almost nothing, while demanding an excessive risk premium for lengthier-duration Treasuries. This has provided an ideal buying opportunity in this sector. One easy way to participate is via the fund TLT, which is comprised entirely of U.S. Treasuries averaging 28 years to maturity, and which has tended to yield just below 4.3% annualized, paid monthly. The expense ratio is 0.15%. If you buy TLT at 92 dollars per share and it merely returns to its August 25, 2010 high of 109.34 in one year, then with reinvested dividends this would represent a total gain of about 23%. If you buy it at a slightly lower prices--it has dropped below 91 several times since the second week of December--or if TLT more closely approaches its all-time zenith of 123.15 on December 18, 2008, then your gains could be even higher. Treasuries may be "boring", but I think anyone would gladly accept such "dull" profits.
On November 3, 2010, the U.S. Federal Reserve announced its second program of quantitative easing, which is usually called "QE2". The media unanimously declared that this would lead to a slumping greenback--and yet the U.S. dollar index began a powerful rally the next morning which has continued to the present time. It is likely that, partly because it is so unpopular, the U.S. dollar will continue to strengthen especially against commodity-country currencies which have been so popular during the past two years. In particular, the Australian, New Zealand, and Canadian dollars, along with the Brazilian real and Russian ruble--all of which have been notable speculator favorites--are likely to decline substantially versus the U.S. dollar through 2012. Some of these currencies may even retest their deep lows from the fourth quarter of 2008 and the first quarter of 2009. If you are a resident of one of the above countries, then your total gain from owning TLT or similar long-dated U.S. Treasury funds could be twice the magnitude of the U.S.-dollar profit when measured in terms of your home currency.
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). Barron's featured my letter to the editor about investing in Africa in their Mailbag of August 14, 2010, which you can read at the link below:
Most recently, Barron's featured me in their MarketWatch section on March 14, 2011:
REMINISCENCE OF THE WEEK (April 24, 2011): Last week I visited the Bolton Hill neighborhood in Baltimore where I used to live. I was walking by one house with its classic marble steps, which were being cleaned in a fashion I had never seen before: using some kind of modern contraption instead of the traditional scrub brush. The husband of the woman doing the cleaning told me: "My wife is really cheating, since she knows she should be down on her knees doing it the old-fashioned way." Just then a fellow walked by to see what was going on. I told him, "I used to live in the neighborhood," and gave him my former address from the 1980s. He responded: "I live in that house now." We talked for awhile about how he had fixed the place up, and the beautiful stained glass, and the enclosed back garden, and some other unique features including a few former notable residents. He finally said to me, "Let me have your business card, and I'll arrange for you to see what it looks like these days." When I gave it to him, he gasped and showed me a pendant which he carried in his pocket. He excitedly exclaimed: "Look closely at my family's Scottish crest, which dates back to around 1300. Notice the brown fishes all swimming to the right, and one white fish swimming to the left. [My logo has several brown horses running to the right, and one white horse running to the left.] The surrouding Scottish motto can be translated as "he who goes against the consensus achieves the greatest prosperity". I couldn't believe what I was seeing, but had to admit that besides our sharing the same address in different decades, our philosophies were startlingly similar. It was also an unusual coincidence that we encountered each other at the same place and at the same time. Would you call this a Black Swan event, or was it inevitable?
· Best of Previous Reminiscences
(c) 1996-2011 Steven Jon Kaplan Your comments are always welcome.