What I love about being an investor, is that you can develop unconventional strategies that happen to work. With contrarian logic you can channel your inner Buffet and make wealth grow from seemingly daunting situations.
Contrarian
For this post we are going to explore the idea of investing in mutual funds using a slightly different metric. We are going to suggest that you look at the worst performing mutual fund in the "balanced funds" sector. This fund should have holdings in blue chip as well as tech stocks. These two types of stock will represent both, speculative and fundamental markets.
Logic
Everyone and their grandmother wants to grab the hot mutual fund. When a mutual fund is considered "hot", the influx of investment capital always pushes it into the stratosphere of earning potential. So let me ask you a question...why wouldn't you want to buy the worst mutual fund with the most profitable stock holdings?
On one side, you enter into the investment right after the fund "pops." When a fund "pops," the value of the fund (percentage-wise) jumps by a sizable amount. That jump signifies that the fund has won the proverbial, popularity contest among casual investors. At this time expect the exponential increase in value to level off. This leveling off of earnings is where most individuals investors jump in. That is where all investors agree, jumping into a fund while it is flying high is buying high. And buying high is a major no-no for investors looking to retire with a sizable amount of income.
On the other hand, we are recommending investing before the fund pops. The contrarian way, is to invest in undervalued funds with holdings in outperforming companies. Your return will be substantial for the lowest amount of invested capital. Even if the return isn't that high for the first few years, by following our process and selecting a fund with a manager with more than 7years experience, you'll see improvements. Our logic is that recession-tested managers will be researching to see what other (higher-performing) funds are holding, as well as the best company for future earnings. This research will show them what they are doing wrong and how they can improve upon their fund's performance. So while they may not be rolling in dough when you first invest, they will be soon enough. When you invest at the bottom for a fund with our criteria, the only place to go is up. And when they roll in dough...so do you.
The Process
The metric to follow contrarian logic begins with going to a fund screener. Once there, screen for funds that have a very poor 3-5 year performance. Among those direct your attention to the funds with the highest 10-15 year performance. Once those funds are populated, look into the holdings of each fund. If the fund holds only blue chip and technology stocks (U.S. Only) write that fund down as one of interest. Here's the last and most important step in contrarian logic: look at the tenure of the funds managers. A manager that has been there for too long may not be willing to change with the times. Managers with little experience may either be awfully brash or incredibly unlucky. You want neither. We recommend a manger that has survived the recession? But not one that still believes that GE or P&G are the best stocks they will ever invest in.
Conclusion
That's it for contrarian logic. Keep in mind this is a theory of investing strategy, it is not proven nor is it agreed with by accreditted organizations. We have been testing it out, and will continue to in the next few years with our personal cash (we want to make sure that we lose cash before you do). We think that this investing strategy probably has an official name somewhere; but until we find it, we are going to name it "contrarian logic."
Think about it, if you were to buy low with great stocks, what happens? Now, what do you think will happen if you diversify your buying low by investing in a fund with over 25 great stocks? Yeah...that's what we thought.
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