Jay Mason is the portfolio manager of the Oasis Growth Fund, a North American hedge fund. He draws on 25 years of industry experience to educate the masses about making better investment decisions through concepts which are legitimately practiced by professional fund managers.
Below, Jay shares 5 key insights from his new book, The Investing Oasis: Contrarian Treasures in the Capital Markets Desert. Listen to the audio version—read by Jay himself—in the Next Big Idea App.
1. Have a plan.
As reflects the mysteriousness and opaqueness of the capital markets, my book metaphorically crosses an expansive desert, where crucial daily decisions can greatly or gravely influence financial fates. Gazing up at the nighttime sky in the heart of the desert, across the horizon in all directions, stars brilliantly taunt our imagination. Scientists estimate there are about 200 x 1024 stars in the universe. Research at Yale University revealed that the naked eye can only see about 9,000 stars on a cloudless night. Yet, just a few salient stars were ever required for the nomads to accurately navigate across the barren deserts. With focused eyes, humans can mindfully distinguish salient information from noise and translate it into meaningful decisions.
Start by having a plan. If an investor is prone to investing on little information and divesting upon superficial price movements, then it’s likely that their better investing intentions are being subverted by gambling instincts. A 2004 article by Michael Mauboussin compared the expected results of gambling versus investing. In the shortest time frames, the results were nearly identical. However, with more time, the results clearly favored investing. That’s because the longer that management teams can deploy value-creating decisions, the more a share price eventually reflects their efforts.
Realistically, each year, there are only two to four weeks when stock prices make big moves. Whether day trading or just nervous about the markets, if you find yourself sitting on the sidelines, you could be trading for table scraps the rest of the year. True investing requires time in the markets. Rather than deploying valuable time, energy, and emotions into trading stocks, establish a core portfolio of quality stocks. Then, layer-in three successive tiers of value-creating tactics where the rewards can be directly justified for the time spent. Take the gamble out of investing by adopting a plan.
“Realistically, each year, there are only two to four weeks when stock prices make big moves.”
2. Research new investment ideas.
When staring out across the desert barrens with no compass in hand, navigating to that next great stock could be near impossible. There are stock selection filters through which you can wean the universe of about 8,000 stocks down to a worthy few. Yet, for those less research-inclined, sometimes it’s easier to simply follow more successful investors.
Check which stocks are being traded by:
- The Super Guru investors
- The Top Financial Bloggers
- The Top Wall Street Analysts
- The Top Hedge Fund Managers
- The Corporate Insiders
3. Deploy contrarian methodology.
Warren Buffet and Charlie Munger are known as the ultimate contrarians. They claim that their best opportunity to add value is to wait for a discount. After the purchase, they rely on the underlying corporate management teams and Mr. Market to do their compounding magic.
“Contrarian rebalancing can harness real value from such predictably unpredictable behavior.”
Yet, being a contrarian doesn’t mean spending countless hours perusing the markets looking for bargain basement stocks. Instead, rather than panning for rare nuggets, I suggest six practical contrarian techniques that can be put to an immediate advantage. One of these is contrarian rebalancing. Stock prices are constantly gyrating due to the collective fear and greed of investors. Contrarian rebalancing can harness real value from such predictably unpredictable behavior.
In an average year, the share prices of growth stocks will range up to +/-15 percent. Contrarian rebalancing harnesses value by trimming and rebuying shares after these gyrations. However, we set a higher trim target at 20 percent while keeping the buy target at a 15 percent discount. This asymmetrical bias reflects that the long-term market dance is inherently positive. Three steps forward, two steps back. Getting ahead sometimes means trimming your advances.
4. Don’t overlook money-making tools.
Most investors are happy to own stocks that pay one to three percent in dividends. Yet, most are blissfully unaware that they could generate an additional two to four percent annually from these same stocks. Imagine owning a home for 30 years and never realizing that you had a tenant in your basement that never paid rent? Selling covered calls against your core stocks will generate this extra income.
As share prices ascend to higher prices, an investor can earn income by undertaking a contract to sell current shares from your portfolio, but at a much higher price over a very short time frame. When the underlying stock fails to reach this higher price by the chosen maturity date, the contract fails, and the investor keeps the full premium—and you set all the contract terms.
The mere mention of an option contract might intimidate some investors, but there’s no need because this contrarian tactic is not complicated, nor is it risky. In fact, by selling a covered call, you transfer the risk to a speculator. Every investor should learn to harness the incredible, low-risk potential of covered calls. Those that don’t are missing out on a lifetime of unearned income from that downstairs tenant.
“Every investor should learn to harness the incredible, low-risk potential of covered calls.”
5. There’s a tool to overcome “Shoulda, woulda, coulda.”
We’ve all regretted not buying a stock when it was cheaper—like say, Apple shares at $90. Well, even though Apple shares recently hit $177, an investor can still submit an offer to buy Apple shares for $90, $100, $120…and will be paid for it.
By agreeing to sell a $90 Apple put option for a specific period (anywhere from one week up to 18 months), there are speculators who will pay a premium to you for the ever-so-slight chance that Apple shares may retrace back to this lower price by the maturity date. Building extra returns on such low-probability events is another way to create value in your portfolio.
The world’s fourth industrial revolution is harnessing innovations through the fusion of humans, data, and machines. The fifth revolution (invoking nanotechnology, biotechnology, quantum computing, and AI) is right on its coattails. So, with 3D, 5G, Augmented Reality, Virtual Reality (AR/VR) and the Metaverse just coming of age, the future is downright exciting. Even if we can’t necessarily contribute to this dynamic future, at least we can own the companies that will make a difference.
Don’t let COVID fears, supply chain issues, robust inflation, or the war in Ukraine sideline you from engaging with the markets. When we attempt to out-smart Mr. Market, we can miss out on the best two to four weeks of any year. The market waits for no one.
Further, investing is an opportunity to be a capital markets activist. Better environmental, social, and governance practices require your participation. Investing is a vote for a world order you want to see. Like any great journey, it’s not only about the destination; it’s also an opportunity to better oneself.
To listen to the audio version read by author Jay Mason, download the Next Big Idea App today: