October 26, 2006 –
Many times people say to me “Oh, you’re contrarian right?” and though I subtitle my blog as “Contrarian investment news you won’t find in the mainstream media”, a much more accurate self-description of my style would be as a “rabbit-hole investor”. Rabbit hole investing is much more than just buying assets when they are hated and selling them when mania surrounds them, as is the behavior people tend to associate with contrarian investors. In addition to implementing that aforementioned strategy when reality bears out a good risk-reward setup, I also seek out investment opportunities that no one is even considering, which wouldn’t fit into the “contrarian box” at all. Rabbit hole investing has more similarities to playing chess than it does to contrarian investing. The only reason I use the word “contrarian” is because nobody would ever understand what I meant by rabbit hole investing. It is said that child chess prodigy Bobby Fisher would think at least seven steps ahead when playing a game of chess before committing to a move. To be really successful in investing, one must do the same.
In light of today’s booming stock markets in India and the U.S., recall my statement from last August 8th in my Newsletter Issue #014: These were my exact words back then:
“With mid–term elections coming up in the U.S. on November 7, you
can be sure that the U.S. will not raise interest rates in the month leading up to these elections for fear of alienating their voting base. Given that the default mortgage rate in California (a good proxy for the U.S. since California would be the world’s sixth largest economy if it were a country, not a state) increased by over 67% last quarter (as compared to the same quarter for last year), I really don’t think that the incumbent politicians want the Feds to raise interest rates and cause a lot of people to lose their homes just prior tothe mid–term elections.
In fact they will probably try to abstain from raising interest rates not only in October but perhaps in the last part of September as well in order to create some sustained momentum from a rising economy and stock market into the mid–term elections (oh, it’s so easy to manipulate the thundering sheep herd. Just give them one good month in the economy and they’ll forget about the USD $1,000,000,000,000 of capital destroyed in the stock markets last month. In psychology, they call this the “recency effect”. Slap someone in the face 10 times, but the next day say you’re sorry and buy them Cartier, Coach, Burberry and Prada, and they’ll love you. Politicians know this and use it to their benefit). So pre-mid election time, you can be assured that the U.S. stock markets will be performing well and this should provide a boost to the global markets as well.”
And sure enough, the DJIA in the U.S. and the Sensex in India hit all time highs this month. This doesn’t make me a genius for knowing that the U.S. and other global markets would be doing well now. It has much more to do with digging down the rabbit hole to uncover the reality of the political-economic machine. Even though investing will always remain an art much more than a science, by doing so, I remove much of the risk in my decisions and transform investing into as much of a science as is humanly possible.
That’s why even though I knew come pre-mid election time, that I was assured the U.S. stock markets and global markets would be performing well, I knew that manipulation would be the driver of these markets. Furthermore, given the true underlying state of the U.S. economy, this current behavior is irrational, so I wanted to know how the government was manipulating the stock markets.
So, as I’ve blogged about in previous entries, I looked at the Goldman Sachs Commodity Index, discovered that they had dumped 73% of their unleaded gas position and reported on this “manipulation” five days before even the New York Times picked up this story. I blogged about how the CPI is full of deceit and never reports true inflation. I looked at many other factors as well, all of which were designed to increase consumer confidence. Then I wanted to see if the public was being fooled. So I looked at the Consumer Confidence Index and saw that indeed, the public was buying into all the manipulation as well.
So when several of my last blog entries have been full of caution and warning and protecting your portfolio, it has absolutely NOTHING to do with the fact that I’m pessimistic just because people are optimistic now. It has everything to do with the reality I’ve discovered by digging down the rabbit hole and the same approach I took ten weeks ago to know that the stock markets would be doing nicely today. As I stated in my last entry, the financial media are like bad weathermen. They report on surface level developments only and in doing so, lead many people into making poor investment decisions.
When I discuss my investments with people sometimes, they ask me “Why aren’t you invested in this? And how come you’re not invested in this industry? Or this country?” — because they are the top stories in the financial media today. They ask, “Didn’t you know these assets were going to be booming now?” And I’ll answer “Yes”. Then they’ll ask, “So why didn’t you invest in them a couple of months ago?”. My reply to that question is –
“When I see mania driving an upward trend that is based upon deception and manipulation, thanks, but no thanks. I’d rather miss out on some gains than be exposed to the risk that will inevitably occur when people discover they’ve been deceived weeks or months later. I’d rather position my portfolio in assets that I know will profit phenomenally when reality bubbles to the surface seven steps later. Like a good chess player, a good investor positions his or her assets not for the immediate payoff but for the pay off down the road that is inevitable. It’s worked for me in the past, it’s worked for me now, and I’m confident it will work for me in the future.”
It’s rabbit hole investing, thinking like a chess player, call it what you may. It works and I’m sticking to it.