Monday, April 03, 2006

Long Term, Short Term and Contrarianism

Most "value" investors tend to view their perspective as being long-term. Long term perspectives on stocks differ starkly from short-term, allowing long-term investors to buy into weakness, and to permit short term players to succumb to fears, uncertainty and doubt.

Yet, many short-term players can enjoy spectacular success by repeating their near-term successes in a series of good decisions. "Don't fight the tape," if your perspective is sufficiently short, is a useful mantra that can allow the trader to punt out some decent near-term returns. Perhaps, going with the flow is just not part of my contrarian and skeptical nature.

Understanding your timeline helps to define the kinds of investment that you want to embrace. Independent thinkers, agnostics, doubters, loners and isolates generally make great value investors with long term perspectives. As Keynes described it in "The General Theory:"

"It is the long term investor...who will in practice come in for most criticism, wherever investment funds are managed by committees or boards or banks. For it is the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."

It does take a lot of bravado to be a decent long term investor. In fact, almost every really good decision that I have made working as a money manager, has resulted in my almost getting fired because it failed the conventionality test. One head of an investment committee was unmercifully critical described me as reckless as I was buying stocks through the first half of 1982 and suggested that I was too young to be managing anyone's money. As the August 1982 rally marked the bottom of the market, I was skated onside. He was enough of a gentleman to acknowledge some six months later that he had been wrong in his assessment and that perhaps it was he, who was being rash.

The challenge is very clear when you manage someone else's money. Our role is to move our clients in directions that are likely to be profitable and successful but to do so without exceeding the client's risk tolerance. Exceeding risk tolerances is tantamount to not fulfilling the fiduciary responsibilities that we bear. How far can we stray from convention?

As individual investors, we answer only to ourselves, or at least ourselves and our often chagrined spouses! Unconventional decisions can be much easier when we face only ourselves and not a committee.

In a market that most experts viewed as difficult, the S&P total return for the first quarter of 4.21% almost equalled the return for the entire year 2005. Healthcare and consumer staples were barely positive, in fact utilities were negative for the quarter. As Leuthold points out in this week's Barrons, the market is decisively indecisive...stuck in neutral. The world (myself included) thought the small-cap rally ended last year, guess what market cap group led this quarter?

Where are the contrarian ideas? I think some of the best are in communications and media, especially radio, but also cable. I find it hard to believe that terrestrial radio is completely dead, particularly, when some of the smart private equity players are buying stations. Companies like Westwood One (WON,) Emmis (EMMS,) Clear Channel (CCU) and Lin TV (TVL) have histories of free cash flow generation for many years and have performed terribly. Comcast (CMCSK) seems undervalued as well. The traders may see falling knives, but with the flexibility of decent free cash flow, these businesses seem attractive to me.

Other businesses, broadly believed to be in decline, also look fairly attractive to me. Readers Digest (RDA) and Deluxe Corp (DLX) are also bottom feeders in the performance race but seem to generate significant free cash flow and are buying back stock.

The greatest amount of money is made from having the greatest confidence in contrarian positions. Going against the grain makes for boring cocktail chatter...not like debates about Sirius or Lucent, at least the LU debates are over with.

Buying what nobody wants and being sure about the longevity and the balance sheet is what makes money.

Disclaimer: I, my family, and clients have positions in WON, CCU, and CMCSK. My family has a position in RDA.


At 9:14 AM, Blogger NO DooDahs said...

"Unconventional decisions can be much easier when we face only ourselves and not a committee."

Which is why, in a nutshell, that most mutual fund managers fail to beat the market indices long-term.

At 10:48 PM, Blogger Dan O'Leary said...

Whatever you do, don't touch Deluxe's bonds! I agree with you on the stock though. This company has buyout written all over it.

Btw, responded to your comment on my blog about YCC.

At 12:41 PM, Anonymous CW said...

How about agriculture/farmland as a long tern contrarian asset class? It passes the test of anyone thinking you're nuts to buy it with plenty of farmers giving up but has the long term fundamentals of demographics and biofuel demand in it's favour. Just need the best way of investing for leverage given that it could be a slow rise.


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