Author Topic: Contrarian Investing: Buy the most hated stocks & prosper  (Read 4703 times)

PEIslander

  • Stubble
  • **
  • Posts: 168
  • Age: 59
  • Location: Prince Edward Island, Canada
Contrarian Investing: Buy the most hated stocks & prosper
« on: January 31, 2015, 11:26:54 AM »
I'm not about to do this but I found it interesting: Quote is from Brett Arends, a columist at MarketWatch.com

Quote
Go back seven years, to the start of 2008. Imagine at that time you had invested $100,000 in an S&P 500 index fund, reinvesting all dividends, using a tax-sheltered account. Today you’d have about $170,000. Not bad.

If, instead, you had invested that money at the start of each year in the 10 stocks that analysts rated most highly, cashing out on Dec. 31 and then buying the top 10 most loved stocks for the following year, today, seven years later, you’d be slightly better off — you’d have nearly $180,000, according to my analysis using FactSet data.

But now imagine you had done the exact opposite, and each year had invested your money in the 10 stocks that analysts rated the worst. How would you have done?

Hmmm.

Today you’d have $270,000. No, really. You’d have earned more than twice as much as investing in a simple index fund.

Here's a link to the article: http://www.marketwatch.com/story/easy-way-to-get-rich-buy-the-most-hated-stocks-2015-01-15?page=1

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: Contrarian Investing: Buy the most hated stocks & prosper
« Reply #1 on: January 31, 2015, 04:07:02 PM »
I think there are two key caveats here:

1) This works until it doesn't. Cherry picking results over a single bull market doesn't make for a robust investment strategy. I'm going to hazard a guess that investing in the most hated stocks of 2006 and 2007 wouldn't have turned out so well.

2) The most hated stocks are often very volatile. High volatility stocks generally return more than low volatility stocks, so higher returns, especially during a bull market, may be more reflective of their fundamental characteristics than their analyst rating.

skyrefuge

  • Handlebar Stache
  • *****
  • Posts: 1007
  • Location: Suburban Chicago, IL
Re: Contrarian Investing: Buy the most hated stocks & prosper
« Reply #2 on: January 31, 2015, 05:29:48 PM »
The lesson here is not how well "most hated" stocks do (since that's unlikely to be repeatable), but how utterly worthless analysts are!

RapmasterD

  • Pencil Stache
  • ****
  • Posts: 589
  • Location: SF Peninsula
Re: Contrarian Investing: Buy the most hated stocks & prosper
« Reply #3 on: January 31, 2015, 06:09:10 PM »
It's an interesting value play. Just make sure to weed out the most hated stocks with definitive viability issues. I.E., Don't buy Radio Shack.

But when I hear multiple analysts on CNBC warning not to buy energy stocks, that makes me very interested...in buying energy stocks. I don't care if I take a 20% haircut in the short term given that I'd only be buying a couple of securities constituting a very small portion of my portfolio for a couple of decades or possibly longer.

They all hated Facebook a few years ago when it was trading in the high teens. Now the gushing is ridiculous as FB is near $76/share.

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: Contrarian Investing: Buy the most hated stocks & prosper
« Reply #4 on: January 31, 2015, 07:53:42 PM »
It's an interesting value play. Just make sure to weed out the most hated stocks with definitive viability issues. I.E., Don't buy Radio Shack.

But when I hear multiple analysts on CNBC warning not to buy energy stocks, that makes me very interested...in buying energy stocks. I don't care if I take a 20% haircut in the short term given that I'd only be buying a couple of securities constituting a very small portion of my portfolio for a couple of decades or possibly longer.

They all hated Facebook a few years ago when it was trading in the high teens. Now the gushing is ridiculous as FB is near $76/share.

But this just get's back to my point about risk and return. You're willing to accept a lot of volatility in the short term in order to achieve higher returns over the long run.

There are good fundamental reasons for energy stocks to be down substantially. It's not some randomly shunned sector that's being picked on by analysts. At this point, I don't even see a long energy play as being contrarian. If feels like for every person who thinks the sector is a wasteland, there are ten sniffing around from a bargain. Heck, billions of dollars are being raised right now to invest in the sector.

innerscorecard

  • Pencil Stache
  • ****
  • Posts: 589
    • Inner Scorecard - Where financial independence, value investing and life meet
Re: Contrarian Investing: Buy the most hated stocks & prosper
« Reply #5 on: February 01, 2015, 07:40:04 AM »
Some of the outperformance of this strategy over the S&P 500 may also be due simply to "randomizing errors." For example, you'd also have a lot more money than the S&P 500 if you had an ETF with stocks starting with the letter A. And starting with the letter B. And C, too. That's how bad market-cap weighted indexing actually is.

Which is funny, because it is so worshipped and the slightest deviation from market-cap weighted indexing is seen by many as completely unacceptable unless you are literally the most highly credentialed professional.

surfhb

  • Guest
Re: Contrarian Investing: Buy the most hated stocks & prosper
« Reply #6 on: February 01, 2015, 09:58:18 AM »
My friend sent me this as he persists to argue that his individual stocks will beat my index portfolio. 

It's hilarious the author decided to choose one of the best bull runs in market history to prove his point. 

Let compare returns in 30-50+ years with a couple bear markets thrown in there ;)

PEIslander

  • Stubble
  • **
  • Posts: 168
  • Age: 59
  • Location: Prince Edward Island, Canada
Re: Contrarian Investing: Buy the most hated stocks & prosper
« Reply #7 on: February 01, 2015, 11:09:50 AM »
One thing I've thought about those "most hated stocks" is that they are likely to be relatively well-known stocks and not true worst of the worst. Without seeing a list I'd think they'd typically be stocks that a few years before were advisors top picks but then didn't perform. Poor performance of a past "top pick" can very quickly transform a stock into a "most hated" even though there are countless stocks that would be even bigger dogs that didn't make the list. It likely that these "most hated" stocks also fall into the "oversold" category. What could be a "most hated" stock for some advisors could be a great "value" play for another. In other words I'm suggesting "most hated" status could be more of an emotional label than a reflection of the stocks fundamentals.

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1384
  • Age: 40
  • Location: Texas
Re: Contrarian Investing: Buy the most hated stocks & prosper
« Reply #8 on: February 01, 2015, 11:24:39 AM »
Show me at least a 50 year backtest and I would give it a second thought.

rmendpara

  • Pencil Stache
  • ****
  • Posts: 602
Re: Contrarian Investing: Buy the most hated stocks & prosper
« Reply #9 on: February 01, 2015, 12:35:15 PM »
I do follow somewhat of a similar strategy, but far more judgmental.

Few things I bought in the past year that were "hated" were WFM @ 42 and BP @ 40 and TGT @ 61.

These were stocks I wanted to add or initiated, but once they were "hated" a lot and the stock had, in my opinion, become attractive, I went in or added.

They don't have to be despised necessarily, but in many cases it's obvious when the market overreacts. Even recently, AMZN dipped nearly 20% from a recent high as did NFLX over 30% down I believe due to misses, but nothing had fundamentally changed in their respective universes. I wanted to get into both, but missed out due to lack of sufficient capital to invest.

It's not foolproof, as there's a lot of judgment in whether a downtrend is warranted, but usually I start researching when I hear a lot of negativity in the news.

RapmasterD

  • Pencil Stache
  • ****
  • Posts: 589
  • Location: SF Peninsula
Re: Contrarian Investing: Buy the most hated stocks & prosper
« Reply #10 on: February 01, 2015, 03:19:56 PM »
I do follow somewhat of a similar strategy, but far more judgmental.

Few things I bought in the past year that were "hated" were WFM @ 42 and BP @ 40 and TGT @ 61.

These were stocks I wanted to add or initiated, but once they were "hated" a lot and the stock had, in my opinion, become attractive, I went in or added.

They don't have to be despised necessarily, but in many cases it's obvious when the market overreacts. Even recently, AMZN dipped nearly 20% from a recent high as did NFLX over 30% down I believe due to misses, but nothing had fundamentally changed in their respective universes. I wanted to get into both, but missed out due to lack of sufficient capital to invest.

It's not foolproof, as there's a lot of judgment in whether a downtrend is warranted, but usually I start researching when I hear a lot of negativity in the news.

Even though there are 73 other people on this forum with the Bob Marley photo, this is a smart post!