Den of The Lion Investor

The term “Contrarian Investing” might be familiar to all value investors. This term is not to be confused with the terms “contra” or “contra trading”, which refers to the buying and selling of shares within a few days (and without putting up any cash) in order to make a quick profit.

A contrarian investor is someone who aims to profit from the stock market by going against the conventional wisdom of crowds. The most famous contrarian investor of all times is perhaps Warren Buffett. He exercises his own independent thinking and hardly follows the crowd. In fact, I would say his actions are usually months if not years ahead of what everyone else is doing.

His words “Be greedy when others are fearful and fearful when others are greedy” describe this thought process exactly. In a recent article that Warren Buffett wrote, he mentioned that he is putting cash to work in the equity markets now - currently the best place he sees for his cash.

He also mentioned that while he can’t predict prices of stocks in the short term, he is sure that in the long term, all the fundamentally good companies would do very well.

A friend of mine whom I shared this with said that of course Warren Buffett could do this. After all, he is rich enough who can afford to lose money in the stock market. I would like to point out that Warren Buffett got rich by doing precisely this - being a contrarian investor.

To borrow a quote from Warren Buffett:

“If you expect to be a net saver (investor) during the next five years, should you hope for a higher or lower stock market during this period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they feel elated when stock prices rise and depressed when they fall. Only those who will be net sellers of equities in the near future should be happy at seeing stock prices rise. Prospective purchasers should much prefer sinking prices.”

The stock market is like a crazy market place where people turn up everyday to transact stocks. Sometimes, you have overly optimistic people willing to bid high prices. On other days, you have depressed people willing to sell what they have at whatever price they might get.

In the midst of participating in this market, it is important not to become one of the extremists. The extreme low and high prices are there for you to take advantage of should you need it. Otherwise, you can choose to ignore them!

One book that I read many years ago on this topic is Contrarian Investing. For the most of it, I would consider myself pretty much as a contrarian investor. I seldom chase hot themes and I like to buy things that nobody else is buying. Low liquidity is hardly an issue. As a retail investor with limited funds, the volume of transactions is more than enough for me to enter and exit positions with ease.

I remember this statement: “Buy when there is blood in the streets and banks are failing.”

I have never seen so much blood and fear in the street.

Big corporations (and banks) failing one after another. Bank runs. Long queues at AIA. The list goes on.

Among some of the people I talk with, very few people are still buying stocks. Some have even sold off their positions with the intention of buying back at a lower price. Many are holding cash. Cash is king.

Amidst all that is happening, I am happily adding on to my positions. And so are many directors of listed companies as you can see from the daily announcements filed to SGX.

I must say all these does not come naturally. There is always a strong instinct to join the herd and sell everything in fear. 

Greed and fear are two drivers of the market. If you can conquer them, you will become a much better investor.

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I was at NUS to attend the talk by Jim Rogers the other day. In case you don’t know who Jim Rogers is, he is the person who started the Quantum Fund together with George Soros. Subsequently, he retired at age 37 to travel round the world once on a bike and another time in a car.

Currently, Jim Rogers resides in Singapore.

During the presentation, he shares his views on China, the USD, commodities (what else) and about his short position in US bonds.

Here’s the audio where you can listen to Jim’s presentation. Please pardon the quality. There’s a bit of cuts in the first few minutes due to technical problems and some slight noise throughout.

Click on the play button above and increase the volume of your speakers to begin listening.

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Warren Buffett was recently interviewed by Charlie Rose on the current financial crisis. He mentioned that he has never seen (in his adult lifetime) such an amount of fear existing in the market as there is right now.

In this interview, Warren Buffett also shares his views on:

• The bailout by the US government and why it was necessary
• His recent investments in Goldman Sachs and General Electric
• The recession that we are currently in and how long it will last
• AIG and why it was too big to be allowed to fail
• The loss of confidence in the credit market and how it will affect the economy

You can watch the video of the interview below.

The complete text transcript is also available at the CNBC website.

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After being unable to get any buyers, Lehman Brothers, once the fourth-largest U.S. investment bank, will file for bankruptcy.

Lehman Brothers said in a statement today that they plan to file a Chapter 11 petition in the U.S. Bankruptcy Court for the Southern District of New York. The filing will be by the holding company and won’t include any of its subsidiaries. 

For Lehman Minibond holders, this means that scenario one will play out.

In other ground breaking news today, Bank of America (BOA) announced a takeover of Merrill Lynch for $50 billion and American International Group Inc. (AIG) is also in trouble as it seeks capital to stay in business.

Warren Buffett has reportedly walked away from talks to invest into AIG.

In an unprecedented move, New York Gov. David Paterson has allowed AIG to use $20 billion of assets held by its subsidiaries to provide cash needed for the troubled insurer. Paterson explained that this will allow AIG to use those assets as collateral to borrow money to fund its daily operations.

Usually, it is very difficult for an insurer to access the funds used to pay claims; this helps to protect the insurance policy holders.

On Saturday morning, I was at Pan Pacific Hotel to listen to Craig Russell, Saxo Bank’s Chief Market Strategist, share some of his market views. Craig has over 20 years of experience in the global currency, equity and futures markets and is based in China.

For some reason, I was a bit lethargic during the session and therefore didn’t really manage to pen down in an organised manner what Craig talked about.

Nevertheless, I did manage to record down some of the sectors in China that Craig was particular favourable about. These include:

• Materials sector - Cement and steel; shortfall in concrete.
• Banking stocks - Possible consolidation in the banking industry.
• Energy companies - Go for the infrastructure companies rather than the producers.

Craig also commented that China was heavily investing in Africa for resources.

An important pickup for commodity traders was on a report issued by the US Commodity Futures Trading Commission (CFTC).

This report is called the Commitments of Traders (COT) report and is refered to by professional commodity traders. Most amateurs don’t have a clue to its existance.

The COT report provide a breakdown of each Tuesday’s open interest for market reports in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. These are broken down into long and short positions (both commercial and speculative).

An experienced trader can make use of the reports to help him in his trading positions. As to the best way of using the report, I’m not really sure. I suppose a search on google should provide some ideas.

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