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.
As usual, great article. Gold was certainly beat on for decades. I technically own a little bit in a commodities mutual fund and I can vouch for the fact that that fund has underperformed for years. It’s just recently that it’s taken off like a rocket. Was it worth keeping it for that long. Probably not, but there is something to be said about diversification.
I loved the challenging your beliefs series. I might keep doing articles when I get a free moment.
I loved your articles, and look forward to more. I have some assets allocated in physical gold, but I don’t consider it a speculative investment. I hold it as diversification against paper assets in general.
Great post. It gets one to thinking. I agree on natural gas. I don’t know about buying the dollar. The U.S. has a serious trade deficit problem that can only be contained by holding the dollar down. Shorting gold is probably worth thinking about although the timing is tricky. Remember what Keynes said, “the market can stay irrational longer than you can stay solvent”.
On less of a contrarian note I would suggest thinking about real estate.
I agree about real estate, though not in Canada since the prices are still quite high here. 🙂 I think the U.S. dollar could see a short rally if we have something else to shake “investor confidence”, but over the longer term, if nothing is done about the profligate spending, I don’t see a bright future for it.
Hi Kevin-You never cease to impress me with your reasoned and intelligent articles. Contrarian investing is certainly more profitable than going with the crowd! I like your analysis, although you are recommending rather sophisticated investing approaches, better left to very experienced investors or those with high risk tolerance. AND the picture is too cute! This was a fun exercise!! Thanks for starting the “against the crowd” idea!
Definitely, that’s why I had to put the disclaimer. 🙂 Personally I think I will go for #1, but probably not #2 and #3. I feel #2 may be true to an extent but without knowing the timing, it’s gambling. And #3… it really all depends on a lot of factors so I wouldn’t take the risk myself, though it may be profitable for others to do so. I like #1, though.
I like all of the ideas you’ve laid out here, but I’m particularly interested in natural gas. Would you invest in natural gas servicers, explorers, producers, or maybe GAS.to?
I’ll have to refer you to my friend who’s an expert on this. 🙂 : Beating The Index
Great post Kevin!
If you are considering natural gas ask yourself: How much patience do you have? The market is not in equilibrium yet as major drilling is still going on in the US for lease holding. US nat gas is bullying the Canadian gas out of the market which will impact Canadian producers who will have to always sell at a bigger discount.
I would wait for signs of stabilization before jumping in with both feet.
I have a lot of patience. I don’t mind riding out the dips. The question is when do we get out of the doldrums? I agree that it could be a while, and there’s always the risk of a disruptive technology coming along in the meanwhile.
I particularly like the natural gas idea, although other alternatives are now debatable (at least in Canada), such as Oil Sand. In all cases, you indeed have to think ahead in order to invest in the upcoming trend.
There’s always the risk of being wrong, but there are risks in anything. 🙂 Until we get the perfect solar cell or nanotechnology, natural gas can fill a valuable niche in our energy economy.
I have a few US dollars around here too, but that is about it! 🙂
I have to say, I am not as well informed as you are about natural gas. However, I do agree that when the market is diving, it is a good time to take a look at a buying opportunity. The question is though, are you catching a falling knife?
When the market went insane a couple years ago and everyone was bailing, I stayed put. I was advised to go to cash and I said ‘no thanks, I don’t need the money for awhile’. I am so glad I held tight as the markets has rebounded dramatically since then, and I literally would have sold at the low.
Gold? Not ready for that either. If I had 100k sitting on the couch next to me, I would consider a rental property. Unfortunately, the only thing sitting next to me are some cough drops, which are quite valuable to me right now also.
Oh, in addition, I am looking into some dividend stocks, but not ready yet.
Catching a falling knife? Nice analogy… I love it. The U.S. dollar might be the closest thing to that since there is so much that can affect it to move in one direction or another. Although it’s still the safe haven that investors run to whenever they’re ‘worried’, clearly without some change in the direction of spending growth, the future prospects don’t look too bright.
Completely agree with you about selling into a panic… why would the markets go to 0? If that happens, will it even matter that you lost all of your money? That would imply all of the wealth of these companies was destroyed, and that probably wouldn’t be a very pleasant world. A cheap market means you can buy with less risk. 😉
I was just wondering, how is gold safer for investing compared to buying stocks or by making deposits in bank?
I have a very limited knowledge on this topic, so I am asking this out of pure curiosity.
Gold is a commodity which pays no dividends like stocks and bonds. When you invest in gold, usually through some type of fund or etf you are hoping the price will increase and then you can sell it for more money. Since gold is priced at an all time high, this would be one of the worst times to invest in gold. You are better off investing in your workplace retirement account in a diverse mix of stock and bond funds. Remember, only invest money in stocks and bonds if you can leave it untouched for 5 or more years, as both investments are risky and their values go up and down.
That’s right, Barb. That’s why I think that one should not look at gold as an “investment” any more than you look at a wad of cash under your bed as an investment. When you buy gold, you are investing in something, all right, but if you only want to buy it for the speculative gains, I think the best time to do that was a few years ago. I do hold some, myself, but for more reasons beyond just that. I also agree with you that investments in the stock market should be held for a decent length of time. I am personally avoiding bonds since I don’t see anywhere for them to go but down, but I guess short-term bonds could still fit into a portfolio.
Thank you both for explaining to me 🙂 I am learning about economics slowly.
I believe that gold is best looked at as a form of money, not as an investment. It doesn’t spin off dividends any more than a wad of cash under your bed will. It is, however, a diversifier to paper assets and the ultimate refuge of wealth.
You can also use gold as your yardstick without actually holding any gold investments.
These links might be interesting further reading for you:
http://www.investitwisely.com/gold-revisited-is-1500-near/
http://www.investitwisely.com/the-great-credit-contraction-and-how-to-use-gold-as-money/
The comments section is even more interesting than the actual posts, I think. 😉
The key to outperforming the market is seeing the value in what everyone else is shunning at the moment.
If the politicians in this country had any brains, they’d be building out a natural gas infrastructure to supply the next 100 years worth of energy for North America instead of tilting at windmills. But, alas, politicians are stupid so don’t expect much price action here. In the meantime, I’ll enjoy heating my house cheaply.
If the US ever gets half-way serious about reining in government spending the dollar will soar. So this bet might pay off.
Gold and silver are running up on economic fear and uncertainty. They are ripe for a correction.
What? No bank stocks or debt of the PIIGS or going long the euro?
Interesting thoughts, Biz! I really also do think that we should be using natural gas to our advantage and building an infrastructure around it. It remains to be seen how the US dollar and gold/silver dynamic will play out, but certainly there might be some fools chasing the next big thing in the gold & silver ETFs.
Thank you for including me!
Interesting article. Back home (a long time ago) one man told me “No matter where you are, what you do, always make sure you have US dollars.” LOL Well, ten years later… I read your post.
Haha. I wonder if the game will be up at some point, though. In the long run the 21st century has the potential to be a very different century than anything that we are used to. We are slowly starting to see this come into being.
Great post; I LOVED the picture! I completely agree with each of your three tips. Number two is definitely worth mulling over to check from every different angle.
Definitely. I think in the long term the dollar’s probably going down, but there’s also the chance it could be oversold for now and 2011 is the time for it to make a short comeback. It all depends on when the next “investor worry” comes along. 😉
I agree with sentiment, because both gold and the dollar don’t go up or down in a straight line, but are susceptible to market emotions. But I don’t think I can guess accurately the next market move, so I try to go with the secular trends: though I’m trading along the way. Hence, I’m afraid to hold dollars that are not working; I sell cash covered puts, so I have a large cash position that is working for me.
Thanks for including me as a belief challenger.
I’m not sure about the USD – you have to have a lot of faith that the US economy is going to recover in the shorter term, but natural gas looks a good idea.
AS for challenging the status quo, I love that selection (and not just because I’m included). Both the ‘don’t budget’ posts are really interesting.
I just see some potential for arbitrage there: relatively cheap natural gas? Need energy? Ok, no problem. In some countries natural gas is exploited much more heavily; in SK many vehicles were equipped to run on it, and in many Asian countries the heating’s all done with NG.
Fabulous post Kevin,
I agree with you that contrarian investing can be extremely profitable if you know what you are doing. I always feel like a voyeur though (I watch the greats from afar :).
Anyway, I think the natural gas play you suggest is intriguing and that this article overall is very interesting. Thanks for prompting us to challenge our core beliefs regarding investing!
Cheers!
I also feel like a voyeur; it’s very interesting to see how these things play out sometimes. I would personally go for the natural gas play, too… Mich above asked how patient do you have to be, but I see these low prices as a good thing for those looking to get in cheap.
Here’s another unconventional investment: rural acreage. To paraphrase Mark Twain and Will Rogers, buy land, they ain’t making more of it.
Just make sure you buy good land that will hold or increase its value. Sadly for some people, McMansions in many parts of the U.S. did not fall under that category.
Since you mentioned rural acreage, I could see some growth in natural agriculture, especially as awareness of the problems of CAFO becomes more prevalent amongst the populace. So long as there are massive subsidies subsidizing CAFO though, this will be harder to achieve, but more and more, people might be willing to pay the difference, and competition will help to bring down the prices somewhat.
McMansions on a 1/2 acre plot, on what used to be a cattle ranch out in the country probably don’t fit the definition of rural acreage. 🙂
I’m thinking more in the sense of 5 or 10 or 20 acres with a little house and barn, or just raw. We recently purchased an older home on 9 acres, about an hour out of town. There’s well water, two good pastures and about a foot of good topsoil for my garden. Several reasons for this investment, not the least of which is that the value of it has been relatively stable.
As for CAFO, our local food coop is doing great business selling sides of grass-fed beef. Definitely an uptrend in good food.
I’m all for natural gas; the world will only need more energy as time passes.
The U.S. dollar, not so much; the U.S. will struggle to keep pace with China, India and other countries who are just starting their industrial revolution.
Cheers,
My Own Advisor
I recently read that U.S. manufacturing has seen a resurgence lately. Interesting stuff! A more competitive world is better for all, even if the change can be disconcerting.
@101 Centavos – totally agree. We are planning to move to a home in a few weeks that has 0.5 acre for partly that reason.
@ Financial Cents – good luck on the move.
I am short the US dollar. The US dollar is in a secular bear market which QE promises to worsen. I am short the US dollar and all fiat currencies, which should be put to work not just lying around somewhere like a GIC or a savings account.
I think I agree with this over the long term, though I don’t know about all fiat currencies. Maybe we’ll see a new paradigm emerge that nobody’s thought of before. Personally, I think we should just give people the choice, and allow contracts in any currency to be legally enforceable.
I’m buying as much US real estate as I can. Rental yields are at 7% and one can borrow at 4.5%. No brainer.
And that’s 30 years fixed, right? You lucky Americans. 🙂
Are you calculating yield as yield on equity, or on a cash flow basis?
I would have to say that I agree with all of the moves although I like oil better than natural gas. I thought that gold had gotten way too far ahead of itself.
Well, oil is easier to transport, but there is a lot of hate going on toward oil especially in the oil sands. The political issues might be a damper, though I agree that that affects natural gas as well.
This is interesting, too: http://dailytradealert.com/2010/09/21/how-to-profit-when-big-oil-bets-on-natural-gas/
Nice article Kevin and well done on the G&M link back.
I’m worried about Natural Gas as the fracking can cause massive environmental disasters, not too disimilar to oil sand extraction I guess. New York is having a massive issue right now: http://money.cnn.com/2009/10/22/news/economy/new_york_natural_gas.fortune/ and some people think that if the extraction goes ahead it could contaminate water supply for the whole State and surrounding areas….. Who knows though it could be propaganda!
The companies should definitely be 100% liable for any damages should anything happen, and safeguards should be put in place. Maybe the people also think that if the state slaps a tax on the output that they won’t see any of the benefit. I would be concerned about that, myself! I have the risk of a NG producer near me but no benefits from it? The companies will have to mount a big PR effort and probably invest in nearby towns to get the people to accept it.
Hi. I just added another post to you unconventional list. Not sure why it didn’t ping back here. Maybe it’s in spam.
http://firstgenamerican.com/2010/12/03/buy-a-house-without-a-mortgage/
It’s there now 🙂
It’s just a matter of time before interest rates climb. There are some ETFs you can buy or short to ride this trend.
I agree, though you never know; the banks could try to keep rates depressed for a very long time. Still, I don’t count on it so I treat the mortgage as if rates were already a few points higher. 🙂
The US dollar has been down for quite some time and most experts would recommend to invest in gold nowadays. However, you are right on the money about these are only money maker before they become popular and the ones who are making the most are the ones who have invested a lot before it becomes the popular pick.
I don’t think I’d put long-term bets on the dollar, myself, but often when you think an asset is beaten up and is destined to only go lower, it surprises you.
Good points all.
In fact natural gas is very attractive. I’ve done a fair amount of analysis that might be of interest.
Below are links to (1) a fundamental analysis of profitability, and why the glut can’t last, (2) a bit about current hedging by gas producers, and what this means for timing of price rises, and (3) a longer term technical view of production and storage, consistent with the view that prices will rise in 2011.
http://www.clearonmoney.com/dw/doku.php?id=investment:commentary:2010:09:04-the_gas_glut_will_not_last
http://www.clearonmoney.com/dw/doku.php?id=investment:commentary:2010:11:08-hedges_have_slowed_the_normalization_of_the_gas_market
http://www.clearonmoney.com/dw/doku.php?id=investment:commentary:2010:12:02-natural_gas_in_storage_again_lower_than_year_ago
Thanks for sharing those links, Jim! I am going to go and give them a read.
The author is clueless! First you say “buy the dollar”… which is a totally fiat, fake, fraud, fiction, fantasy, fractional-reserve scam being created in endless quantities to enrich the international ganster banksters and enslave mankind. Then you say “gold and silver is good stuff” (presumably because it isn’t fiat toilet paper) “but sell SLV and GLD”. Well, I too believe SLV and GLD are scams, but shorting a scam like that is outrageously dangerous, because you must have your timing exactly right or you will be wiped off the face of the earth financially if your timing is slightly wrong.
Hi honestann,
Although you might be right about the dollar, most investors don’t share your opinion; the fact is that it is still the asset of choice whenever investors “worry”, and there are times when it can be oversold, especially when everyone is bearish. I also agree that shorting SLV and GLD is not for the faint of heart. You should due your own due diligence before making any investment. 🙂
Given your comments re: the dollar, you might find these posts interesting:
http://www.investitwisely.com/the-great-credit-contraction-and-how-to-use-gold-as-money/
http://www.investitwisely.com/gold-revisited-is-1500-near/
Cheers,
Kevin
Whether to short GLD or SLV gets back to the question that Kevin asked on my blog on the Gold (paper) Ponzi scheme: when is it going to collapse? If I understand correctly, those ETFs apparently own too many derivatives–too much paper, and not enough of the physical metals. When will all this paper collapse? No one knows, so I have to agree with Honestann that shorting them would be an extremely risky move. But if you shorted it, say a couple billion dollars, you would inherit the earth if the ponzi scheme collapsed before you became insolvent. In the meantime, you’ll suffer huge losses as more investors turn to precious metals to protect themselves against the disaster of badly managed fiat currencies. The only thing I’m shorting today is the US dollar. It’s the only bet I’m willing to make at this point.
These investment moves are called unconventional for a reason. 😛
Have you ever checked out http://fofoa.blogspot.com? I think you would find it interesting.
Until monetary policy is changed to reflect a positive yield in interest rates, there is no reason to back the dollar, and plenty of reason to stay away from it (the euro too for that matter), notwithstanding occasional counter trend rallies in either. If one takes the view that the only reason for the QEs is to dilute the national debt (nothing to do with fighting deflation), then clearly the end result will be inflation and therefore dollar weakening should persist over time. The perception of dollar strength or weakness might however be masked by the apparent rotational trend in euro strength/weakness such that it becomes confusing to investors. If in doubt, measure both against commodities or currency proxies like gold.
You would probably enjoy this guest post by Trace, costas: http://www.investitwisely.com/the-great-credit-contraction-and-how-to-use-gold-as-money/
Those are all interesting investment ideas. Perhaps even buying the dollar AND precious metals as a hedge that could still see both rally. The dollar may well gain vs. other western currencies especially. It may seem counterintuitive but we’re the lesser of two evils when comparing the Euro, British Pound, and some others. Meanwhile, with our printing presses running full-out, perhaps we continue to see gold and silver rally. Nat gas? I’m surprised it got this low, we are in a recovery after all. I expect with Obama’s deal he announced last night, that’s the best we’re gonna get in terms of biz recovery of the next few years so we may see industrial consumption start ramping up from current levels.
I wonder how the game will end should the taps be shut off. It seems like the money that was piling into homes a few years ago is just going elsewhere these days. I agree that the USD is probably still preferable among the ugly sisters. It’s where investors go to whenever they “worry”.
Of the 3 “unconventional investments’ I mentioned here, I think natural gas makes the most sense. I see the current low prices as a real bargain right now. Thanks for stopping by! 🙂