A Quick Lesson on Contrarian Investing
So I have a confession to make…
DIYwealth and my Finance Daddy persona is not how I make money.
(But so far it’s been a great way to spend money! 😘)
I’m primarily an equity analyst and copywriter. I look at stocks and the economy and write about them. And people pay me for it because I’m really good at it.
I’ve been doing this since about 2015, when I quit teaching.
It was around that time that I became the managing editor for a research service founded by Mark Ford and Tom Dyson called the Legacy Portfolio.
The premise of it is simple:
Buy a small basket of some of the biggest, most dominant bluechip companies in the world.
When they dip in price relative to their intrinsic value (which I explain here), buy more.
Pool the dividend income you get from them and reinvest that cash into the dippiest stocks.
Aside from cryptocurrency and selling options, it is still by far the most successful product I’ve been involved with or written for, in terms of track record.
How did it sell as a product?
Hah!
Terribly!
If it’s one thing I’ve learned that people hate, it’s actually making money in the stock market.
Time to whip out this meme again…
Average investors be like:
The reason people hate this “buy and hold” style of investing is that it runs against every evolutionary synapse woven into the limbic, lizardy parts of the human brain.
This is how your amygdala sounds:
STOCK GO DOWN?
$ TAKE LONG TIME?
DANGER STOCK
WANT $ NOW NOT LATER
ME NO LIKE
BUY WHAT GO UP FAST FAST
I was just having a conversation with an acquaintance – a young man who’s “very interested in learning how to daytrade” – the other day…
And he said, “The main thing that worries me about holding long term is just all the things that can pop up and drive the price down.”
My heart hurts reading this…
But you might actually be feeling the same thing as him right now.
(The S&P 500 is down -10% and the Nasdaq is down -16% in the same timeframe, but that’s neither here nor there.)
So let me tell you a story about why I’m such an ardent “buy and hold” guy even though I know that, from a business perspective, DIYwealth could make much more money selling quick option and penny stock trading newsletters.
A Story Titled:
A Stretch Of Time In Which Everyone Panicked About a Stock’s Price Going Down But, As It Turns Out, They Were Wrong And I Was Right
(Alternative Title: Neener Neener Neener)
Ok, one of the stocks in the Legacy Portfolio?
It’s the energy company Chevron (CVX).
I believe March 2016 was the first time a reader wrote in to Mark Ford and I about selling Chevron from the Legacy Portfolio.
This reader was very smart. They cited a lot of data, pointed to declining financial strength, and referred to recent news articles about the stock saying that energy companies were "dead."
(Financial publishers love to say “such and such industry is dead.” It really milks the clicks.)
I totally understood his concern...
The price of the stock had been plummeting after the price of oil crashed in 2014 and 2015.
For over a year, the stock was experiencing a slow bleed, declining from about $130 to about $85. You can see this decline in both Chevron’s price and the price of oil (the two are HIGHLY connected) in the chart below.
Mark Ford and I had a meeting about it. He posed a ton of questions to me and another analyst who worked on the service.
We talked about the fact that Chevron's free cash flow had declined so much that it was hemorrhaging $10 billion, which put its huge dividend at risk (it was as much as 5% to 6% in 2015/2016).
(Free cash flow, by the way, is the cash left over after a company has paid its expenses and paid for other things, like working capital and dividends. Free cash flow determines how much a company can reward shareholders, pay down debt, or pursue growth opportunities over the long term.)
Simply put, things were looking tough for Chevron.
So Mark asked me the most important question: Should we sell Chevron?
My answer: "No. We should be buying Chevron. It's trading at a huge discount."
That was all he needed to hear. We recommended buying more Chevron.
There were other moments like the one above about Chevron, specifically.
In fact, I think I've fielded more questions and concerns about kicking Chevron out of the portfolio than any other stock!
For example, on April 29, 2020, I received a note passed along from readers expressing concern about the fact that Chevron had a sizable operation in Venezuela, which had just been sanctioned by the U.S.
Meaning: the U.S. would no longer be importing oil from Venezuela.
(This detail is especially apropos, if you’ve been following recent news about Russian sanctions and oil bans.)
And don’t forget: at the time, the price of oil had gone “negative” as well!
The price of Chevron, then? Close to $90 per share.
Was it time to sell?
I looked at the data: Chevron’s Investor Relations page and press releases and financials, the filings the company had made to the SEC, Chevron’s patents, the impact that crude oil futures prices have historically had on production levels using historical EIA data, the growth of energy consumption relative to the forecasted decline of oil production I got from the analysis of that EIA data.
(If you wonder what I spend most of my time doing on any given work day, it’s this kind of stuff.)
And in the end: "Chevron is a buy,” I said.
Then a year later, on April 4, 2021, I was working on a large report for another newsletter I write for.
The topic was on TaaS (or "transportation as a service") innovations, which partially involves the electrification of vehicles. (You can learn more about it here.)
Electric vehicles, it turns out, don't need gas.
So I received this question from one of my colleagues (actual quote): "TaaS will cause disruption in the oil industry (and also many other sectors). Then I think CVX is in danger. What do you think about it?"
I looked at the data. Again.
I replied "I think CVX still has long term potential" (actual quote) and then provided my reasons why I thought Chevron was still a buy at the time.
Chevron's share price was around $105.
Now, reader, if you’ve been keeping track, that’s three instances over 5 years of people having that negative limbic reaction: “CHEVRON DOWN CHEVRON BAD SELL CHEVRON.”
That’s also 5 years of me saying, “Yo. Take a chill pill. Buy Chevron. Also shut up.”
Now, because of inflation, supply chain constraints, international oil embargoes, increased demand, the possibility of prolonged international conflict…
The prices of oil and gas have skyrocketed.
Guess what this did to Chevron.
The stock just surpassed $171 per share on March 8, 2022.
Between March 8, 2016, and March 8, 2022, the total return for Chevron (its price appreciation plus reinvested dividends) since then has been 146%, at time of writing.
In fact, Chevron’s total returns during that time frame are greater than the S&P 500 over the same period.
But you only would have seen these gains if you… bought the dip.
And then if it dipped more? You bought more.
And then did that over and over again for half a decade.
Now, I'm not telling you this to gloat (well… maybe a little).
I'm also not telling you this to assert that it's time to buy Chevron now. (It is not. Oil prices won’t go up forever.)
I have a ton of other stories just like this one.
Chevron just happens to be a good example of how most good long-term, value-based investments go…
Everyone hates them for long stretches of time, so there’s a lot of selling and downward price movement.
But as long as the data and the fundamentals tell a different story, it’s an opportunity for you to buy.
This is how you actually make money in the stock market over the long run.
You have to be a bit of a contrarian.
You have to zig when everyone is zagging.
You have to buy when people are selling.
You have to be greedy when others are fearful.
You have to be like Keith Gill.
Who’s Keith Gill?
He goes by the usernames Roaring Kitty and DeepFuckingValue.
He made over $34 million by heavily betting on GameStop.
If you’re one of the people who got really interested in the financial markets during the Meme Stock craze of early 2021, you might be familiar with Keith Gill.
But what you probably don’t realize is that he made his bets on GameStop public in August 2019, after everyone said that GameStop was “dead” and the company reported lots of negative news.
People online called him, and I quote, “stupid and autistic.”
Keith was a buyer when everyone else was selling, because he looked at the actual data and not what everyone else was saying.
And even when the stock made him a millionaire? He didn’t sell his whole position to capture profits.
He held on…
Through bad news and pandemic crashes and nonstop negativity and insults…
For years!
And it made him tens of millions of dollars.
That’s what it means to be a true buy-and-hold, value-focused investor.
Could you do that?
Do you think you have the confidence and competence to know you’re right when the markets, institutions, and your peers are telling you you’re an imbecile?
Do you have the fortitude to watch something in your portfolio – the value of your hard-won savings – go down and down and down for years… yet still buy?
Do you have the patience to wait for multi-year economic and business cycles to play out?
Do you have the willpower to listen to the screaming, lizardy-limbic part of your brain warning you of danger… and then do the opposite of what it’s telling you?
If you don’t…
Stock investing probably isn’t for you.
And that’s fine!
You can still make money by taking a safer approach.
Consider looking into the safer, income-producing funds I’ve been talking about in the Finance Daddy $10 Daily Challenge.
My daily $10 investments in $TDIV and $DTD?
They’ve been doing great while the overall market has tanked.
And it’s not because those funds are doing better than the market (they aren’t)…
It’s because every day, automatically, I’ve been buying the dip. This averages down my costs.
If you want your wealth to grow and compound over time?
This is the mindset you need to cultivate when it comes to investing.
Especially considering what I’ll be talking about next time…
Because there’s an economic recession coming in the U.S. in the next 12 to 18 months.
