03 September 2011

Why a Contrarian Can Always Buy Low Sell High?

Why a Contrarian Can Always Buy Low Sell High?
Contrarian always do the opposite things from the public. Why can they do so? What make them do so? And what is the result of it?

They always have a clear mind that isolate themselves from the public. They always want to observe the market and reacts against it. It takes a very high risk to do so, especially when most of the people against his decision made. Let me give you an example:

In Year 1999, Warren Buffett avoided the High Tech. Stock. He explained to the public that he could not understand or how to value a high PE stock or high Future PE stock. Everyone was excited of the millenium and the new technology. When everyone looks good in one stock/sector, the stock/sector may at the same time overvalued or enjoy very high risk of collapsed.

I remembered a lesson learnt from a senior. He always adviced us to invest in Low PE stock. But normally Low PE stocks divided into two groups:

1. They deserved the Low PE as they are in the low growth industry / sunset industry. If you cannot liquidate the stock, then you may end up wasting your time for waiting the stock's PE to turn to normal.

2. They are hidden gem. Most probably they are also in the sunset industry / low growth industry. But if you could spend more time analyzing it, and try to figure out the competitive edge against other competitors, then you may enjoy a higher than expected return.

I also always remember that good stock always enjoyas high ROE. But later in my investment journey, I realized that ROEG is more important than ROE. Why? Becuase You must maintain or increase the ROE consistently, for at least 5 years. It shows that the ROE that your company achieved is not a temporary result that could be manipulated by the management. Of course, management could create a fake result, such as Enron, Megan etc.

I always remember the rule "Never Lose Your Money'.

First of all, we should think that our money is not our money, but a retirement fund that we will need it some years later. So, try to treat it like that, and you would be able to stay calm even if you experienced a short term volatility, because you already knew that the good stock that you invest would enjoy a higher dividend as well as higher earnings in future. You could sleep well everynight. :) Of course, this is all about my opinion.

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