Image by K's GLIMPSES via Flickr
Last year, I wrote about 3 Unconventional Investment Moves to Make in 2011. This was a look at a few unconventional investment moves that went against the grain of common wisdom at the time. When the herd is running in one direction, it might be for a good reason, but sometimes, there are benefits to running in the opposite direction and this is where the real gains can be made.
Did this hold true for the 3 unconventional investment moves of 2011? Let’s take a look and see how these investments did.
Natural gas
Conventional wisdom
Conventional wisdom holds that there is a glut of natural gas, with too much supply and not enough demand to meet this supply. Natural gas is not as easy to transport or convert as other fuel sources, so bringing it to the places where there would be demand is also more difficult.
Contrarian viewpoint
It’s true that there is a glut in natural gas, but on the other hand, oil and derivate products have become a lot more expensive over the past few years. Natural gas would be a great alternative energy source for electricity generation, and one that can be easily exploited starting today. This glut simply looks like an opportunity in the making and a great chance to get in at a low price.
Results
Natural gas prices were $4.73/GJ in January 2011, and are $3.76/GJ this month, down about 20%. Environmental protests have slowed down the exploitation of natural gas sources (though perhaps the environmentalists don’t realize that this would help us to reduce reliance on coal, a dirtier fossil fuel), and ongoing debt crises and excessive government intrusion have slowed down the economic recovery. If there is an opportunity here, 2011 was not the year for it.
Winner: Conventional wisdom.
The U.S. Dollar
Conventional wisdom
Everyone knows that the U.S. debt is unsustainable and that at some point, some time, the value of the dollar is going to have to drop precipitously in order for the U.S. to meet all of its future funding obligations, in nominal terms. The only alternative is for the U.S. government to renege on its promises and legislate a different set of promises for the future generation. Which is easier? Devalue the dollar so that the promises can still be met in nominal terms, or start a political firestorm by reopening the debate on medicare, social security, etc…?
Contrarian viewpoint
The U.S. debt may be unsustainable in the long-term, but this is a trend that is still in the making, and the U.S. dollar is still the lingua franca of the world economy. Money also floods into the U.S. dollar due to short-term disruptions, such as the ongoing debt crises in Europe and turbulent equity markets. It’s possible for the dollar to get oversold in the short term due to excessively negative investor sentiment, leading to a buying opportunity.
Results
The U.S dollar index was around 80 at the start of the year, and around 79 at the start of last year. However, we saw the index dip below 75 at times, which would have presented better buying opportunities. The U.S. dollar may plummet eventually, but 2011 wasn’t the year for that to happen.
Winner: Contrarian viewpoint.
GLD and SLV ETFs
Conventional wisdom
It’s actually hard to say what conventional wisdom should be here. Gold is not usually looked at kindly by the mainstream, but when I wrote the article last year, conventional wisdom at the time seemed like gold prices had nowhere to go but up, and that now was a good time to get in before fiat currencies went to hell and it was too late.
Contrarian viewpoint
For a contrarian viewpoint, I suggested that it might be better to short the GLD and SLV ETFs. Physical gold and silver themselves may be going up, but how do we know for sure just how much actual gold and silver are owned by investors via these ETFs?
Results
GLD rose from about 130 to 152, and SLV stayed roughly around 27. Silver did run up in a big bubble in the middle of the year, which burst rather quickly as well. Shorting from that bubble would have been a good idea, but it’s a wash from year beginning to year end. Shorting GLD from its own peak in August would have likewise been a good move, but shorting would have cost you money from year beginning to year end.
If GLD and SLV are flies in search of a windshield, then they did a pretty good job of avoiding all of the cars in 2011.
Winner: Conventional wisdom.
Reader, what are your thoughts on these unconventional investing ideas, and do you think that circumstances might change in the future? What do you think are the most unconventional investments for 2012?
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 got creamed in TSE:PMT, but I still have that small position. I also hold some physical bullion and a few U.S. dollars around somewhere.
Interesting idea. I guy I used to work with was very much the contrarian. He continues to view the investment world in a negative light, not long on anything (to my knowledge) .
I think that if I take the contrarian viewpoint, conventional wisdom will win out…
I am too big of a chicken to invest in commodities. I thought gold was overpriced at a thousand it it kept climbing. I have been intrigued by silver at times, but the volatility gets to me. I would sell too soon I am sure, either to minimize losses or lock in gains.
Kevin, contrarian investing depends so much on timing. I think all of your contrarian ideas remain valid, but who knows when the market will turn. I bet in 10 years gold will be less, natural gas will be higher, and the dollar will buy less. But in 6 months, I wouldn’t bet on any of them.
Great discussion.
I think in order to play around with commodities, I’d have to be way better read on what’s going on in the marketplace, or be back in a sourcing role where it’s part of my job to understand what’s going on and the indicators that drive pricing.
For example, energy demand is actually decreasing in the US due to people buying smaller cars and doing energy improvements. Conceivably we may become a net exporter at some point.
THANKS FOR POSTING THIS!
We’ve been all over this as well on Common Cents…
http://www.commoncts.blogspot.com
I think natural gas is a good Long term investment, because it is inevitable that we will eventually use more of it. The volatility in the price is largely due to the fact that most people don’t understand fracking – the process for obtaining unconventional resources – and all the myths around it.
@Thad P
Interesting, so he shorts exclusively? That’s gotta be a bit scary when things go up.
@Kris at Everyday Tips
Just invest in a Canadian index; you’ll get some decent exposure to commodities as well as invest in us Canucks. 😉
@Dr Dean
Good point, hard to say when things will change. The U.S. Dollar is a big wildcard, since the situation is so complex and also, scares in Europe and elsewhere send people rushing back.
@First Gen American
It could conceivably happen once solar gets cheap enough (it is nearly there) and some of that desert land around Las Vegas and elsewhere is put to use.
@Steve
Np 🙂
@Savvy Scot
I really don’t understand why the environmentalists would prefer we continue burning coal or importing oil from the Middle East. I don’t know if they have thought their arguments through.
I would like to suggest a simple Method of investing in exchange traded funds and closed end funds that can greatly increase returns while at the same time lower risk. I believe this method because of its simplicity can enable even those with limted financial knowledge to become rich with considerable less risk. This is a very unconventional investment method but I believe that its a very effective Contrarian investment method. Anyone that has any doubts as to the Accuracy and validity of the information provided below feel free to check it out with any competent financial advisor. I feel totally confident that my analysis will withstand any serious security.
Im am speaking about exchange traded funds and closed end funds from the perspective of a citizen of the united states. The following may not apply to investors worldwide.
Their are now over fifty single country funds available and maybe over 100 narrow sectors like airlines steel solar so why the concern for the nasdaq or the standard and poor five hunderd each one of these countries and sectors is a index of and by itself The solar exchange traded fund {TAN} is now down 90% from its high in 2007. If I were a investor or trader I would simply look for any exchange traded fund or closed end fund that does not use any leverage in their porfolios and start buying in the ratio of 0.50 percent of your cash on hand in my account after their is a 75% decline from its all time high and than buy twice as much in the ratio of 1.00 percent of your cash on hand in my account if that exchange traded fund or closed end fund declines another five percent an 80% decline from its all time high buy twice as much in the ratio of 2.00 percent of your cash on hand in my account at a 85% decline from its all time high buy twice as much in the ratio of 4.00 percent of your cash on hand in my account at a 90% decline from its all time high and finally buy twice as much in the ratio of 8.00 percent of your cash on hand in my account at a 95% decline from its all time high. Now I know that some of these funds will not decline 90% from their all time highs. Another thing that you might be wondering about I would run out of money. If I followed that method right wrong example take one hundred thousand dollars. Example Buy 500 dollars of xyz fund at 25 dollars off 75% from its all time high of 100 dollars buy 1000 dollars of xyz at 20 dollars off 80% from its all time high of 100 dollars. Buy 2000 dollars of xyz at 15 dollars off 85% from its all time high of 100 dollars Buy 4000 dollars of xyz at 10 dollars off 90% from its all time high and finally Buy 8000 dollars of xyz at 5 dollars off 95% from its all time high This way you will have your biggest positions in the funds that have declined the most and the smallest positions in the funds that have declined the least. Also keep in mind that if your cash position in your account is say one hundred thousand dollars to start this will gradually decrease as the equity portion of your portfolio increases. Example If your cash position is fifty thousand dollars of your one hundred thousand dollar portfolio you would invest one half of one percent to start which would be two hundred and fifty dollars. Also keep in mind when you buy an exchange traded fund you are buying a basket of stocks so the fund cannot go to zero unlike a stock. Than when any fund has regained three quarters of its value that would be say fund XYZ which traded at 100 dollars five years ago. It now trades at 75 dollars in the case of XYZ. Now you would use a 15% trailing stop loss to protect your gains. So if XYZ declines to 63.75 from 75.00 you would be stopped out insuring that you retain most of your gains. If XYZ continues to rally without correcting by 15%. Who knows you may sell out of the stock within 85% of its all time high. Its all time high could be 150 dollars..
And their you have it a simple but brilliant strategy for exchange traded fund and closed end fund investing.