Saturday, May 15, 2010

The Life of a Chinese Contrarian Value Player

It is important to realize that investing using contrarian value strategies is a long-term game. One roll of the dice or a single hand at blackjack is meaningless to the casino owner. He knows there will be hot streaks that will cost him a night's, a week's, or sometimes even a month's revenues. He may grumble when he loses, but he doesn't shut down the casino. He knows he will get it back.

As an investor, you should follow the same principles. You won't win every hand. You will have periodes of spectaculair returns and others you might diplomatically describe as lousy. But it is important to remember that contrarian value strategies, like the odds for the casino owner, put you in the catbird seat. Professional investors, along with everyday folks like me, normally forget this important principle and demand superior returns from every hand.

Even though a strategy works most of the time and generates, excellent returns, no strategy works consistently.  The fast-track, aggressive growth stocks will, on occasion, knock the stuffing out of low-P/E or other contrarian methods for several years at a clip-sometimes longer. But over time, it's simply no contest. Still, human nature being what it is, our expectations are almost always too high.

Even when we look at the record of these superb returns (which encompass both bull and bear markets over decades), we are still disappointed that a contrarian value strategy doesn't win each and every year. The probability is zero that any investment strategy would, just as it is that you will win a hundred straight hands at blackjack.

It is widely known that contrarian value strategies have an excellent record of doing better in bear markets. So if we are still in a bear market or we are going to be in one, your Chinese(OTC)stocks with a low P/E could be a nice hedge and outpace the market handily for years to come.


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