A little something different today, as I take a few guesses about what to invest in for the year ahead (and beyond). It’s a fun exercise. And “if you wish to keep from guessing wrong,” as Humphrey Neil used to say, “learn to think contrarily.” I try to do that below.
Who was Humphrey Neil? And what is contrary thinking? Let’s start with that…
The Art of Contrary Thinking
When I was coming up as an investor more than 25 years ago, I remember I used to love the idea of being a “contrarian.” (I think differently about it now, which I’ll get to in a bit…)
I must’ve read Humphrey Neil’s Art of Contrary Thinking three or four times. I haven’t looked at it in years, but in thinking about this post, I pulled out my well-thumbed copy.
I’m assuming you’ve been involved in markets for a long time yourself and are wise to its ways. I think it is easy to forget how strange the markets seem for people who are new to them or inexperienced. In other areas of life, expert opinion carries more weight than it does in markets. For example, most people would be loath to go against what a consensus of doctors or engineers say they should do.
But in investing, it can be very profitable to question a consensus and go against it. The reason is mainly one of pricing: out of favor assets are usually cheap. Popular assets are usually expensive. (As Buffett once said, “you pay a high price for a cheery consensus”). Neil’s book is all about questioning the consensus. As he writes:
“Basically, the theory merely calls for getting into the habit of asking queries, such as, ‘Suppose the opposite is true, then what?’”
The Art of Contrary Thinking is philosophical, not data-driven. It’s anecdotal, not systematic. It’s from 1954, though it has been though at least ten printings. (I have the fifth and enlarged edition). I am not sure how it would hold up to modern scrutiny. But in re-reading certain pages, I found it is still an enjoyable read, full of interesting quotes and examples.
By reading Neil, my younger self learned about quirky books and thinkers such as Gustave Le Bon’s The Crowd: A Study of the Popular Mind and Gabriel Tarde’s The Laws of Imitation. Neil taught his readers about financial cycles and loved to cite long forgotten thinkers on the subject such as Clement Juglar, William Stanley Jevons and Theodore Burton. These give the book a warm patina, a feeling of having weathered many financial seasons.
There was a publisher, Fraser Publishing, in Vermont, that reprinted all of these old books on finance. I used to gobble those up. I still have a shelf load of those books – must be thirty of them. Some of them are very short, mere booklets. Others are fat and substantial, such as The Theory of Investment Value by John Burr Williams. All have some historical interest if nothing else.
One of them is Five Eminent Contrarians by Steven Mintz, which includes chapters on Dean LeBaron, John Neff, Michael Aronstein, David Babson and a charming chapter on Humphrey Neil himself – the “Vermont Ruminator” as he was sometimes called. (When he was 82 years old, a young reporter went to see him and asked him what he was up to now. Neill said, “Ruminating, young man, ruminating.”)
Neill lived in an old farmhouse in Vermont, on the edge of the Saxton River. An excerpt from Mintz:
“Humphrey hammered away his formula on a Royal typewriter in a room off the kitchen. In the barn, kept the library crammed with dozens of volumes of historical statistics, business periodicals, and other references. He did much of his ruminating in a nearby field behind the barn and across the street.
‘I am writing now in the shade of a 120-year-old maple and can look through its massive branches to green pastures beyond,’ Neill wrote ten months after the Great Crash. ‘A delightful, century old house and neighborly barns somehow bring a quieting philosophy and a peaceful perspective upon the problems of Wall Street. We need to get away frequently in order to realize that market fluctuations are not the all-important facts in life.’”
Investing lore supports Neill’s idea of pushing against the crowd. Where I think differently about it now: I realize bending against the crowd for its own sake is just another way to avoid having to think about something. The crowd is right enough of the time to foil a simple contrarian strategy. You want to have a thesis. Whether it’s contrarian or not shouldn’t be the main driver of the thing. Plus, it’s not always easy to tell what’s “contrarian.”
Still, I’ve never been able to shake the basic idea of contrary thinking and Socratic questioning gleaned from this early reading. Even to this day, I’m reluctant to look at or own “popular” stocks. I prefer to own stuff that’s more out of the way.
Then again, maybe I shouldn’t make apologies. I enjoyed reading a Business Insider piece this week on the #1 fund of the last 20 years: AMG Yachtman Focused Fund. The current manager is Jason Subotky. Here is an excerpt:
"Most of what we do is fairly contrarian because that's where you get the best prices," he said in an exclusive interview with Business Insider. ‘We've made a lot of money in very unpopular positions over time because the valuation can become incredibly attractive.’
Being contrary for its own sake doesn't work very well; there has to be a method. Subotky says his funds are relentless in looking for undervalued companies and flexible in thinking about where their value comes from.”
Well said. Neil would’ve been happy to hear it. Undoubtedly, he would’ve clipped this story and put it in his one his books.
Anyway, the above is an aperitif for what follows. It is in the contrarian spirit of my younger self and Humphrey Neil that I offer the following “ideas for 2020.” (As always, I can change my mind at anytime and don’t have to tell you, yada yada. See our disclaimers here).
A Few Guesses and Ideas for 2020:
1. Buy something in energy
If you are looking for an interesting place to put money in 2020, the energy sector deserves a look. You will be in good company. A recent FT headline says “Big-name US investors take aim at beaten-up energy sector: Warren Buffett and Sam Zell among the managers betting that oil and gas stocks are oversold.”
The “energy industry” has been the worst-performing sector of 2019, so says the FT. I don’t think it’s done so hot over the last decade either. But, in any case, if you’re brave enough to venture in, it seems odds favor you getting a good price. Contrarian thinking, remember?
Just look at a few stock charts: Sandridge Energy, Antero Resources, EQT Corporation… holy cow. And these are just a few I’ve looked at and not the worst. Nonetheless, there are some pretty good businesses in oil and gas, or related to it. If you stick with strong balance sheets, high insider ownership and free cash flow, you’ll weed out most of the sector. What’s left could be interesting.
I own one energy company that has no debt, generates significant free cash flow, has a history of buying back shares and is growing. It’s not that liquid and I’m still buying, so I won’t share the name just yet. But I tell you this only to show that I’m putting my money where my mouth is here. This is not just brave talk.
2. Buy something in the UK
The FTSE Index has barely gone anywhere for five years. I don’t know if the UK market as a whole is undervalued on the numbers. But it feels contrarian to be bullish on assets in the UK. Maybe not that contrarian if Goldman Sachs is pushing it, but they do lay out a plausible thesis in a recent report. Per the UK Telegraph:
“Goldman Sachs is betting on a ‘Boris boom’ and a surge of foreign fund flows into Britain if the election delivers a clear outcome, propelling faster economic growth through the early 2020s than in the struggling Eurozone. [As I write this, the election results are not yet in…]
The US investment bank expects a ‘Brexit Breakthrough’ and a catch-up surge in undervalued UK assets as one of its top seven trade ideas for 2020, advising clients to take the plunge on sterling and beaten-down equities in the domestic sector.
‘We have identified more than $150bn (£116bn) of UK inflows that could be unlocked by some progress towards Brexit resolution. The upcoming election will reset the Parliamentary arithmetic and potentially clear the way,’ it said.”
Maybe. All I know is that I’ve been finding some interesting ideas there. We have four UK-listed names at Woodlock House. One of them I bough recently is InterContinental Hotel Group. It is un-levered, has a beautiful asset-light business model, generates plenty of free cash flow and has returned gobs of capital to shareholders over the years.
Okay, so it’s not a direct UK play, but the stock is well off highs, in part because of Brexit worries and Hong Kong and other stuff. But this seems like a great business to own long-term and the price is fair for such a quality asset.
Click here for a good summary on the company.
3. Buy something in India
A lot of bad press for India this year. It seems every time I read something about India in The Economist, or the WSJ or The New Yorker even – see “Blood and Soil in Narendra Modi’s India” – it’s bad. A recent Economist headline pointed out: “India’s economy is growing at its slowest pace since 2013.”
Still, the Indian stock market (SENSEX) is up about 12% this year and it doesn’t seem cheap at first, so being bullish on India may not seem so contrarian. But the smaller cap stocks are more interesting. Here’s part of a story from Livemint:
“The Motilal Oswal India Valuations Handbook… shows significant mid-cap undervaluation. It places the PE of the Nifty Midcap 100 at 14.9 compared to its 10-year average of 20.7. Navneet Munot, chief investment officer, SBI Mutual Fund, in a note on the market outlook, issued on 4 September, also noted attractive valuations in the mid- and small-cap space.”
The problem is investing there. My vehicle for getting exposure is through Fairfax India. (We own it in the fund). The stock hasn’t done anything year – in fact, it’s down. But I really like the Bangalore Airport, in which it has a controlling stake. And I like the IIFL companies (there are three of them), which should continue to grow rapidly over time. You can buy Fairfax India below its Q3 book value of ~$13.50 and you get Prem Watsa’s India-based management team working for you. I think Fairfax India rebounds in 2020 as its underlying investments bear fruit. We’ll see.
Whatever you do: Leave room to buy more
At a conference somewhere, I heard Seth Klarman say that in bull markets we learn bull market lessons and in bear markets we learn bear market lessons.
In a bull market, you learn that everything you buy was a good decision and everything you sold was a mistake. In a bear market, you learn the opposite: Everything you buy seems like a mistake, and everything you sell seems like a smart decision.
2019 was a year in which it was easy to learn bull market lessons. But I’d say this: leave yourself some room to buy more. Rare is the stock that you buy right at the bottom and everything after that is peaches and cream. You almost always get another chance to buy more at lower prices. Give yourself that chance.
Last idea: Holiday reading
Thank you for reading. I hope you enjoyed today’s post.
One last thing I would recommend for 2020: Get yourself a copy of Boyar’s Forgotten Forty. I’m not getting paid anything to make this recommendation. I just like to support friends of mine doing good work.
The Forgotten Forty is my favorite financial read this time of year. It usually arrives shortly after Christmas. It’s a fat report on legal-sized paper that profiles 40 stocks the Boyar team thinks have the greatest potential for the year ahead. I always open it full of anticipation and eager to read about the ideas.
You can send my friend Jon Boyar an email for details:
Thanks again for reading. I wish you and yours the best this holiday season!
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Published December 12, 2019
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