StockWatch
Contrarian Coup
“The time to buy is when the blood is running in the streets,” Nathan Rothschild once said.
But, how can you put this apocryphal advice to actual use? What does it look like in practice?
For an answer, you need look no further than what Goldman Sachs Group Inc. did in mid-August, when it looked as though the capital markets might dry up completely, and the stock market appeared, to many, to be on the verge of a meltdown.
The blood was, most definitely, running in the streets.
So, what did Goldman do? It invested 2 billion dollars (that’s billion with a “b”) of its own money in one of its hedge funds that was hemorrhaging.
The payoff? Its 2 billion-dollar investment has grown by a cool 320 million dollars in the short time that has elapsed since then -- in other words, a 16 percent return in just one month.
In the newsletter arena, the closest analogy to Goldman’s contrarian coup (at least that I can think of) is what the late Al Frank did on October 20, 1987. Frank was the editor of The Prudent Speculator, and his letter’s model portfolio, like most hedge funds today, was highly leveraged. (The newsletter is edited today by John Buckingham, who employs much less leverage than Frank did.)
And, October 20, 1987, of course, was the day after that October’s Black Monday -- the worst single-day crash in U.S. stock market history -- with the Dow Jones Industrial Average falling some 22 percent. Frank’s highly leveraged portfolio fell 57 percent on that day alone, according to the Hulbert Financial Digest’s calculations.
That’s a whole lot of blood.
What did Frank do? Far from running for the hills, which was what almost everyone else was doing, he urged subscribers to buy.
That took guts, and his newsletter’s ranking was amply rewarded for having them.
Since then, the Prudent Speculator is, far and away, in first place for performance among the newsletters tracked by the Hulbert Financial Digest. Over the nearly 20 years since Frank’s post-crash buy advice, the newsletter’s portfolios have gained 3,857 percent, in contrast to “just” 825 percent for the Dow Jones Wilshire 5000 index. On an annualized basis, this is the difference between 20.4 percent and 11.9 percent.
To be sure, opportunities, such as the one that faced Al Frank in October 1987, or the one that Goldman Sachs faced last month, don’t come along everyday. An integral part of the job of being a contrarian is being patient -- waiting for those occasions when panic has come to dominate investor emotions and has brought prices down to fire sale levels.
Being a contrarian is not for the faint of heart. But, those who have the fortitude can earn outsized profits.Mark can be contacted via email at mhulbert@marketwatch.com.
