All of us know about conventional investment movements once they become popular. In the late 90s, it was stocks. In the mid 2000s, it was real estate. Some are now saying that the next hot trend is gold. Riding these trends can be highly profitable, if you get in at the right time.
The problem with following trends is that the easy money is usually made before the trend gets very popular, and once the trend becomes more about popularity than about investing fundamentals, and more about buying in the hopes of flipping on the investment to a greater fool than about buying based on fundamentals, then that might be a sign that things are getting dangerous. After all, you don’t want to end up like one of these guys:
So, what did these investments look like before they became popular? Battered and bruised, for the most part. Stocks suffered greatly throughout the 70s and only started picking up in the 80s, real estate had a dismal decade in the 90s, and gold was dissed for decades after the last bubble burst in the early 80s. Anyone putting money in these investments during their darkest hours would have been called a fool; these very same investors, however, are the ones that would have reaped the greatest profit, once these investments regained their shine and lustre.
So why did these investors choose to invest in these assets, even though their values were at rock bottom and everyone was fleeing them in droves? These investors tuned out the noise, analyzed the fundamentals, and after doing so, they made an educated guess based on their analysis. Given a positive fundamental outlook, low asset values greatly reduce the risk of buying into a bubble. If you believe that you make money when you buy an investment, not when you sell it, then you want to buy at the cheapest price that you possibly can.
Here are three different assets that are currently being dissed by the mainstream, and therefore might be good contrarian investment moves to consider:
3. Invest in natural gas
Natural gas has really taken a beating over the past few years. At current prices it’s hard to see how some extraction operations will remain profitable. Why are prices so low? Some are blaming excess supply and weak demand; others are blaming mild weather (they should come up to Canada during the winter time!)
While it’s easy to look at what has happened in natural gas and claim that the industry is finished (or at least dormant for now), there are a few problems that I have with these claims: while low prices are bad for investors, they should be great for consumers. If peak oil is a reality, and if oil dependence is a bad idea, and if natural gas is dirt cheap right now, and if natural gas is cleaner than oil, and if natural gas is abundant, then… we should be exploiting the heck out of natural gas! Whether for electricity, transportation, or heating, natural gas could help fulfill many crucial roles in our energy economy… and in taking on a bigger role, you can expect prices to rise.
2. Buy the U.S. Dollar
The U.S. dollar has rapidly plummeted over the last few months. With news of quantitative easing, massive debt overhangs, and a weak economy, it seems like the neck of the greenback is on the guillotine board… or is it?
In spite of all the bad news, the fact remains that the U.S. is still the world’s leading superpower, with high productivity and a large economy. The populace has seen where the road to serfdom is leading them, and on November 2 they collectively took a step back from the precipice. Although the USD has already jumped back somewhat due to further contagion in the Euro zone, it could still potentially be oversold.
1. Short the GLD and SLV ETFs
While I see the value of gold and silver as money, I do believe that they may be problematic as certain types of investments. GLD and SLV come to mind as precious metal investments that may be dangerous. When you invest in GLD and SLV, you may think that you’re holding physical bullion, but are you really? Are your holdings insured? Do GLD and SLV really hold the assets that they claim to? If the SHTF, will GLD and SLV have enough physical bullion on hand to satisfy redemption requests?
With counter-party risk at every step of the chain, GLD and SLV might be ETF bugs in search of a windshield. If and when they blow up, you might very well wish you had never heard of them… unless, that is, you happened to be on the short side of the trade. Just some food for thought.
Other unconventional investments
101 Centavos recently blogged about investing in uranium. I’m not sure if this is unconventional in the sense of going against an investor tide, but it is definitely an interesting sector to look at!
Challenging our assumptions and beliefs
I wrote this post because it can be helpful to challenge our core beliefs and argue the opposing point of view. In doing so, we can learn something new, or spot something that we might have missed.
Here are some great posts from fellow Yakeziers and personal finance bloggers that challenge the status quo and their own personal beliefs in one way or another:
- Buy a House without a Mortgage (First Gen American)
- Don’t Put Money in Your 401K (First Gen American)
- Don’t Save for Your Kid’s Education (First Gen American)
- F$&*(%&# Frugal (Ultra High Networth)
- Five Reasons To Stop Being Frugal And Get A Life (Aloysa’s Kitchen Sink)
- Scrooge Had The Right Idea (Control Your Cash)
- Top 5 Reasons Not to Budget (Budgeting in the Fun Stuff)
- Who Are You To Tell Me It’s Not Worth The Money? (Financial Samurai)
- Why I Have No Budget This Year (Barbara Friedberg Personal Finance)
Thanks for participating in the roundup, guys!
So, reader, what are your own thoughts on these investments, and which contrarian bets would you be making in 2011?
Disclaimer: This post is for entertainment purposes only and is not to be taken as investment advice. Do your own due diligence and talk to your financial advisor or security professional before making any trade. I currently hold a small position in TSE:PMT and a few U.S. dollars around somewhere.