Wealth: Guts & Glory

If you have a strong stomach, undervalued stocks could yield a feast

Jupiter Images

When Netflix came on the scene, Blockbuster stock plummeted from nearly $30 a share to about $3. Then, after restructuring its operations, the traditional movie rental company’s share price more than doubled. “Investing in Blockbuster was clearly a contrarian investment at $3 a share, as many felt the company was doomed,” says Haddon Libby, a local investment banker and contrarian who worked with Bank of America Securities for 10 years.

Contrarian investors deliberately go against the prevailing wisdom of other investors. To do that successfully requires a strong personality, belief in your convictions, and patience. Contrarians take the opposite view often favored by Wall Street on market segments and individual stocks. Their mantra: Buy out-of-favor and undervalued stocks.

“Contrarian investing should be a component of any thoughtful, diversified portfolio,” Libby says. “Done with strong research and conviction, contrarian investing is core to consistently outperforming the market.”

This kind of investing takes guts. When technology and other high-growth stocks  were all the rage, slow-growth stocks fell out of favor and became relatively undervalued. If you diversified your portfolio with both value and growth stocks, then applied trailing limit orders, selling stocks if they fell 20 percent in price, you probably were well positioned to avoid a major hit like many investors took when the tech bubble burst.

The challenge: Find investments before the masses do. Look at other economies. Libby invested in South American stocks before the recovery of those economies was widely reported. How did he do this? Friends with family in Argentina, Chile, and Brazil saw an improvement in their economies that was below the radar of U.S. stock research firms. Investing ahead of the curve netted Libby above-market returns.

Joan Lappin, founder of New York-based Gramercy Capital Management Corp., has followed contrarian principles for decades. A Wall Street alumnus since the ’60s, Lappin contributes to Forbes.com and TheStreet.com. She writes about stocks she likes, as well as the reasons she won’t put some big stock names in her portfolio.

“As a contrarian, you always have to be ahead of the crowd — that’s the only way to make money,” she says.

Lappin often buys stakes in companies where senior management falls short of delivering picture-perfect results. “I look past that to the fundamentals and ask, ‘Did the company not perform because of inept management or was it simply overtaken by marketplace forces it couldn’t control?’”

The hardest part comes after you buy. “You need tremendous belief in your own convictions that the company is doing interesting things in the right way, and [to] have the patience as a long-term investor to wait for the reward to come,” Lappin says.

If you decide contrarian investing fits your investment strategy, carefully read the footnotes when studying annual reports and other corporate financials. Ask yourself, “Is something terminally wrong with this company, or is it just what’s going on right now?”

If you’re considering a contrarian money manager, interview them and ask about their philosophy and exactly how they select stocks. However, Libby cautions, “Many investment advisers are just trying to sell inventory.”

One Wall Street veteran who has seen his share of red and black ink sums it up this way: “You have to be willing to make an investment, make no money for two years, and have the personality to possibly watch it fall and not bail out."
Palm Springs Life

Related Articles

Spa at Ritz-Carlton Rancho Mirage Focuses on Indoor-Outdoor Wellness

The Ritz-Carlton Rancho Mirage Spa has unveiled a full menu of treatments and fitness offerings, with a focus on indoor-outdoor wellness.

Listening to Your Autonomous Voice

Listen to your autonomous voice, and find the happiness you forsake when you are too distracted to be absorbed in something you love.

Love Without Boundaries

The Coachella Valley is home to an impressive host of animal-centric organizations that make it their mission to help desert residents through interaction with trained, caring animals.

Where to Dine Out Locally on Your Diet

Here is a compilation of Coachella Valley establishments that fits your Paleo, Vegan or Juicing diets.

Agua Serena Spa Offers Skin Analysis to Aid Treatments

Dr. Richard Fox uses a VISIA complexion analysis machine as part of the skin treatment process at Agua Serena Spa at Hyatt Regency Indian Wells.

Promotions + Contests

90 Days of Summer Romantic Palm Springs Getaway 2014

90 Days of Summer Romantic Palm Springs Getaway 2014

Experience the beauty, romance and excitement of the Palm Springs area when you enter to be the lucky winner of this romantic couple’s getaway
90 DAYS OF SUMMER Instagram Contest 2014

90 DAYS OF SUMMER Instagram Contest 2014

Win a fabulous Palm Springs weekend!

Win a fabulous Palm Springs weekend!

Each month, a first place winner will be selected to win a fabulous Palm Springs weekend!And, each month, three additional runners up will be selected to win a wonderful Palm Springs area Dining certificate!
2013/14 Best of the Best

2013/14 Best of the Best

Palm Springs Life’s annual Best of the Best. Readers tell us who their choice is for the “Best of the Best” of the Coachella Valley in over 40 categories.
Cartoon Caption Contest

Cartoon Caption Contest

Each month, we provide a vintage 1950’s cartoon illustrated by Alice Rovinsky. You are invited to submit a caption or vote for your favorite caption.
Enter to Win A Celebrate Dance Experience!

Enter to Win A Celebrate Dance Experience!

Enter just once for a chance to win tickets to one of the second annual Palm Desert International Dance Festival performances.