Contrarian Investing | Investment Survival in 2020
Updated: Apr 5, 2020
How to invest during uncertain markets. Embracing volatility and using it to your advantage, while maintaining a long-term perspective.
Hello ladies and gentleman welcome to the Elias Talks money v-log where I talk all things money and motivation. Today I'm going to talk about Contrarian investing.
Contrarian investing is an investment style in which investors purposefully go against prevailing market trends by selling when others are buying, and buying when most investors are selling.
And the reason I'm making this video is watching TV specifically CNBC and listening to certain people who will remain nameless pumping up stocks that perform well in the current environment like Zoom Video, Teledoc, and Amazon. While these are not bad companies at all. I do hold Teledoc and Amazon I suggest you shouldn't be chasing these companies right now, I would suggest this is a time to go deal hunting instead. Looking for companies that can survive through this environment, and that will prosper afterwards.
So for example companies like FB, Google, and VISA will see a reduction in business, but they will still survive and will be there when this mess is done. All these companies will be hit hard by less spending, but for all 3 their usage rate of their services might actually go up, or not be that impacted.
If you're at home more you will go online more to use google and Facebook, and if you need to buy something online good chance you'll use a credit card. The change in behavioral habits can be beneficial to the companies longer term.
Just looking at these charts right now, which one do you think is a better bargain 1-2 years from now even when we through this. It's against human nature to think long term perhaps, and even professionals can fall into this trap.
Furthermore, the next category of companies to look for those that are willing to take more risk; are companies that are completely in the eye of the storm. Companies being completely devastated. So while the average company is down 35% or so these are down much more like 100 % or 200 % or even more.
In our current situation the most obvious example is Travel related stocks like Boeing, South West Airlines, United, Delta, Carnival Cruise Lines, and Royal Caribbean for example. They are down far in excess of 35%. If people can't move around these stocks essentially have little revenue.
Think about whether you think these companies will actually make it out to the other side of the virus. Usually in these situations the strong survive, or those that are too big to fail and or more easily get private and public funding. For example, Boeing directly and indirectly though it's supply chain employees 2 million Americans or more. They are also operating in a global duopoly of aeroplane manufactures. It's them and airbus. The government will do everything it can to keep them afloat.
When you look at the biggest cruise lines there is a natural barrier to entry, because these cruise ships the good ones are in the 100s of millions to build. To get the financing for these things is tough for a new entrant without the skills and expertise to even get funding. Also smaller cruise companies will be under greater pressure because they don't have 100 of millions on their balance sheet like a carnival cruise lines for example.
Like Boeing the government is also more likely to save large cruise lines through direct intervention because of how important they are to the economy.
The North American Cruise line industry directly employs about a 1/4 million people, and large cruise lines have better ability to get private financing. Currently Carnival is seeking $7 billion in funds through a mixture of debt and equity issuance and is currently getting advised by JP Morgan according to reports.
My suspicion in these situations is that you will get industry consolidation. The strong will survive and the weak will perish, and there is a good chance Carnival will eventually take market share from weaker competitors. While there is some risk the potential reward is much greater than other companies that have been less impacted.
So lets look back to 2008 and financial crisis at the banks and what happened to them. Essentially we were afraid of the banking system collapsing similar to how we feel about now the free movement of people being forever hindered right now.
Bank of America went from 50 something dollars all the way to nothing down to around 5 bucks. Now around 21.6 dollars.
JP Morgan went from the 50 dollar range down to the mid teens at the low. Now around 91 dollars.
Wells Fargo went from like the mid 30s all the way down to around 10 bucks. Now around 30 dollars.
Citigroup went from the 500s all the way down to around 35 bucks. Now around 43 dollars.
With the exception of Citigroup if you invested in the US banks at in around their lows when there was maximum fear you would have done well. Ironically on those 4 that I mentioned Citigroup by Total assets was #4 in size at that time, all be it by not a large number. These banks right now are well off their recent highs it should also be mentioned.
This time period after 2008 was marked by industry consolidation. A lot of this happened due to bank failures, so market share was taken by the bigger banks. Between 2008 and 2012 465 banks failed. In contrast to 5 years prior to 2008 only 10 banks failed. Despite restrictions and tight regulations there was a tonne of financial institutions that were acquired, and largest banks increased their market share positions.
In conclusion, my advise is to try and be a bit contrarian in these times don't be a front runner. Don't put too much emphasis on short term trends i.e. The VIRUS. Stretch out your time horizon. Just because you don't catch the bottom perfectly doesn't mean it's not a good investment.
In psychology there is a term called recency bias, and both people and the stock market are folly to this . In can be sometimes hard to imagine these companies that are being devastated won't come out the other end.
Who the hell would want to ever go on a cruise again right after the became an incubator for the virus? Probably people were thinking the same thing after 911 and aeroplanes!
What happened in the case of flying is that regulations got put in place for more secure screening of passengers, perhaps in the future there will be more health and safety precautions on cruise ships to help avoid a similar situation.
Which of the cruise lines have the means to be able to do this and which ones don't? Regulation can become a barrier to entry.
Instead of loading up on the few companies that are doing well as a result of the virus. Think of the companies that are hindered, but not broken and can easily come out the other end and be just as strong or stronger because they are in secular growth industries. If you are willing to take some more risk pick up companies that are best in breed in troubled industries that are suffering. Ones that are too big to fail for example and warrant big government bailouts, or have the means to secure financing through the debt or equity markets. Those with the strongest balance sheets, market leadership positions, and are in the best positions to weather the storm. Often those that can stay in the game will get stronger afterwards and those that are weak will perish. The companies that stay in business will take market share.
Lastly, Be careful not to be a front runner and load up stocks that are performing well short-term. When the market turns around those are the ones most likely to also get dumped as people rotate out into the stocks that were getting hammered previously.
That's all for today. Thanks for watching my video and those are my thoughts on the subject. If you enjoyed my video please like and subscribe to the Elias Talks Money YouTube channel or follow me on the Elias Talks Money Facebook Page. Over and Out.