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Man going against the grain

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What’s a Contrarian to Do?

Evan Cooper Jul 21, 2015


Zig when markets zag. Buy when there is blood on the streets.

Those are the fundamental principles of contrarian investing, which for those who have the courage of their convictions, no qualms about being perceived as more than a bit odd, and a healthy dollop of patience, often pays off.

In today’s markets, however, being a contrarian is hard work. There’s no clear cut consensus about much of anything, which a contrarian requires for, well, contrariness. And what many forecasters, seers, prognosticators and strategists see — a kind of economic and market muddling along — is the kind of mush against which it is difficult to posit a clear contrary strategy.


“Conventionarians”


Take the recent weekly outlook from David Kelly, Chief Global Strategist for JPMorgan Funds. Kelly is an accomplished and respected observer of markets, and his current views offer little direction either to contrarians or, if I may coin a term, “conventionarians.”

He starts off by pointing out that we’re in the 73rd month of an economic expansion and the 76th month of a bull market in stocks. That’s good. But he notes that valuations are now about 8% above their 25-year average, which he says isn’t all that alarming, but means that stock prices could rise more slowly if valuations came back to “normal.”

When he looks at the economy, Kelly finds that we are about 80% of the way to minimum unemployment (which is now 5.3%). This means that if economic growth picks up we face greater inflation and declines in stocks and bonds, or that if growth slows we’d have an economy incapable of delivering “more than mid-single digit earnings growth, which, given current valuations would add up to very mediocre long-term equity returns.”

Kelly concludes by saying, “There are too many unknowns in this scenario to make an exact prediction of long-term outcomes for U.S. stock and bond investors.”

An outlook like that makes contrarianism tough. But not one to give up on finding the bright side of gloom or dark clouds lurking behind rainbows, I fund fuel for contrarianism in the consensus around one asset class — cash.


Cash is King?


Since the days are long gone when money market funds produced double-digit returns, many financial planners and investment professionals don’t even think of cash as an investment. They view it as a liquid asset that everyone should hold in order to weather a job loss or other income disruption.

As an investment, pretty much everyone agrees that cash is a clunker. Yields are so low, in fact, that no one even speaks of cash yields in percentage terms anymore; they talk in terms of basis points, which are fractions of one percent, or as Wall Street loves to say, “bips” — a term that also can serve as a sanitized shorthand for “bupkis,” the not-in-polite-company Yiddish word for nothing (it literally means goat droppings). If we’re talking return on investment, 15 bps certainly is bupkis.


The Bottom Line


So is cash a contrarian investment? Maybe. Even if it’s earning next to nothing, cash provides a safety net. As our wise paediatrician once advised, “A baby can’t fall off the floor.” Similarly, as long as you don’t put all, most or too large a chunk of your assets in cash, having a modest cash nest egg can help cushion a market decline. Then, when everyone else is panicking, you can use your cash to make smart buys of quality stocks that pay handsome dividends.

How much to keep in cash? Advisers say six months’ income in cash should be kept as a nest egg. For portfolio purposes, Charles Schwab says anywhere between 6 and 30 percent. The answer for you depends on your age, risk tolerance, other assets you hold and your economic and market outlook. Being in the higher range probably would qualify you as a contrarian.

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