Let’s face it. Every investor thinks that he or she is a contrarian. Why would people start investing if they don’t think they have what it takes?
But the truth is that few investors act like contrarians. The reason is simple: it’s exhausting to swim against the tide and disagree with people you like and respect.
This is why so many investors unconsciously go mainstream. And not only do they do the wrong thing (follow the herd), they chose a peculiarly strange herd to follow.
I call this herd the “shoppers.” In his book Behavioral Portfolio Management: How Successful Investors Master Their Emotions and Build Superior Portfolios, C. Thomas Howard, CEO of AthenaInvest, writes that when he and his team examine potential clients’ portfolios, they constantly see the same four dozen stocks, most of them well-known brand names.
50 is a tricky number. Holding that many stocks makes you think you are well diversified. But in reality, your portfolio is likely concentrated in various shopping-mall brands, plus the brand of car you drive to the mall, plus the gas station you stop at to refuel, plus the brand of smartphone plugged into your car.
Bottom line: this is not enough.
Also, it’s hard to follow 50 stocks: the sheer number of press releases, regulatory filings, earnings calls, and presentations you’d have to listen to would quickly become overwhelming.
And it’s not just retail investors. Professionals pile into the same stocks, too, although there’s a twist. “Closet indexing” is when a professional manager quietly follows an index instead of making independent calls. This gives the manager a sense of security, but he runs the long-term risk of losing clients who don’t want to overpay for passive index following.
That’s why we never compare the performance of Money Forever Portfolio to the S&P 500 or any other index. Following the mainstream market is not our game.
But I don’t delude myself into thinking that ignoring the S&P is a great idea, either. Being a contrarian is more than saying no to the mainstream. It’s recognizing opportunities as they appear in various places.
Understanding and practicing “smart contrarianism” is how we pinned down our portfolio allocation strategy. And it fits surprisingly well with the “something old, something new, something borrowed, something blue, and a silver sixpence in her shoe” philosophy I was reminded of while watching the delightful Bridesmaids movie with my wife recently.
The “old and blue” part includes stocks with blue-chip characteristics: stable, big-dividend payers from a variety of industries and geographies. Investing in stocks alone is risky. By truly diversifying, we’ve balanced the risks and rewards.
The “something new” part includes sectors and companies that are not on the average investor’s radar. Here’s a secret: you don’t need to be a small, private, seed-stage company to escape the public’s view. It’s surprising how much investors chasing the same bucket list of stocks overlook.
Take, for example, business development companies (BDCs), which provide debt to other firms and pay out most of their income in distributions. BDCs don’t get much hype, but they keep humming along, generating cash for their shareholders.
We recommend only the BDCs that meet our criteria, of course, and managing risk is paramount. Mind you, we’re not talking about start-ups: BDCs aren’t early-stage ventures, and the companies they invest in often have growing cash flow and a growing asset base.
“Something borrowed” is our third category. It’s not all debt here, but we hold several corporate and government debt funds that, together, provide both yield and security.
The “silver sixpence” is a type of investment we keep outside our main portfolio. Silver and gold are two examples of core assets. Precious metals are insurance to us, and everyone needs insurance. Most income generation, however, comes from stocks and meticulously vetted “underdog” investments.
Each month, we share the exact investments we’ve picked for our “something old, something new, something borrowed, something blue, and a silver sixpence in her shoe” and the ideal way to combine them in Money Forever Portfolio. I would like to tell you more; join us today.