Churchouse Letter
September 2014        by Peter Churchouse

The Bears are Wrong

There are some investors who always go against the flow, and are proud of the fact. Pure, outright contrarians.

I’m not one of them. I think it’s too restrictive to tie yourself to just one approach.

So I’m no hard-core contrarian. But over many years, I’ve learned that it can pay to head in a different direction from the herd. You’re much less likely to get trampled.

Right now, we're staking a position on an highly unpopular market. Everybody hates this one at the moment.

This is a short to medium-term tactical play. The stage is set for us to make a lot of money in the coming year or so if we are prepared to bet against the bears here...

In fact all four of our current recommendations made in this space this year have given us double digit returns....

.... And I expect this month's recommendations to give us more of the same.

Enjoy the issue,

Peter


Sometimes it Pays to be a Contrarian Investor

On Facebook or Twitter, new research shows that people are less likely to post their views about major issues if they think their “friends” or followers don’t agree with them. It’s a fascinating insight. Pew Research looked at the Edward Snowden affair, where opinion was pretty much divided down the middle on whether what he did was right. Either way, people didn’t want to share what they really thought online. And that made other people less likely to chime in, too. It’s called the “spiral of silence.”

I’m not surprised. Voicing an unpopular opinion can bring laughter, scorn, anger or grudging acceptance – sometimes all at the same time. I know. I’ve been on the receiving end, as I’ll explain later.

In this piece, I want to get you thinking about a contrarian investment proposition. It’s a short or possibly medium-term tactical play on an investment that has seriously underperformed for many years. And it’s a market that people hate right now. Actually, that’s understating things. They loathe it!

It’s not hard to see why. Everything you read about this investment right now is bearish. It’s pure doom and gloom.

Here are just some of the headlines in the past month. And I’m not just cherry-picking the pessimists. This really is the current sentiment.

“XXXXX debt tops 250% of national income”

Financial Times, Aug. 4, 2014

“Debt ratios soar at developers in XXXX”

South China Morning Post, Aug. 5, 2014

“Default storm seen as record private bonds mature”

Bloomberg, Aug. 6, 2014

“XXXXX’s $343 Billion Payment Lurks in the Shadows”

Bloomberg, Aug. 8, 2014

“Growth fears weigh on XXXXX trusts”

Financial Times, Aug. 12, 2014

“Has XXXXX Lost Its Magic Wand?”

Bloomberg, Aug. 18, 2014

I’m well aware that some of the world’s greatest investors are religiously contrarian, and will only invest in stuff that nobody else is interested in. I’m not that hard core. To me, it doesn’t make sense to limit your options to such a rigid philosophy. Sometimes the consensus is right. Sometimes it’s not.

Having said that, some of the best investments I’ve ever made have happened when everybody else was fighting for the exits.

Warren Buffet has a simple rule. “Be fearful when others are greedy, and greedy when others are fearful.” And he’s right.

The perma-bears have been telling me for years that I need to get out of U.S. stocks. Fine, but the S&P 500 has given me a 20 percent annualised return in the past 24 months. Will it correct? Sure, at some stage. But in the meantime, I’m making money, and I’m staying completely disciplined on my trailing stops.

Most investors love consensus. They love being part of the herd. Bizarrely, a lot of people don’t mind being wrong as long as everybody else is wrong! Fund and wealth managers in particular are susceptible to this.

But I’m not managing your money against an index. My only job is providing you with the best investment ideas that I can. Honestly and independently, with the aim of helping you make money. If we make bad calls, there’s no comfort to in me saying “Well, everyone else was wrong too!” You’ll just cancel your subscription voting with the click of a button!

It can be lonely making an unpopular call. Back in 1994, I stood on the podium in the glare of the spotlight of an investment seminar, with a bunch of chairmen and CEOs of very high-profile listed companies as my fellow panellists.

Commercial property in Hong Kong had been on a tear, and everyone was bullish about it. I came out and said I thought prices in the sector were going to fall by around 25 percent. It was what my numbers were telling me.

The tycoons shot me down on stage. Occupancy was really high and demand was strong, so how could prices fall? But in the days to follow, a few of them called me to hear exactly what I had to say.

I explained that investors were buying commercial property for yields of around 4 percent. But thanks to a crisis as far away as Mexico, and a few other factors, interest rates had hit 6 percent and were heading higher.

In other words, things were out of synch, and that’s what I said. Either rents were going to have to shoot through the roof, or prices were going to have to fall. My take on demand was that rents weren’t going to rise that fast. So prices had to give.

I was wrong. Commercial property fell closer to 40 percent.

Anyway, take a look in Figure 1. That’s how this market’s stock index has performed over the last five years. Not exactly pretty. The other index I’ve benchmarked it against is the S&P 500. Our investment has underperformed the S&P 500 by 140 percent. Yuck.

The consensus says you don’t go near this market. It’s been a no-go, an “underweight” for years.

By now you’ve probably guessed it – I’m talking about...



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