Treasures against the tide in the desert of capital markets

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Jay Mason is a portfolio manager at Oasis Growth Fund, a North American hedge fund. It draws on 25 years of industry experience to educate the masses on making better investment decisions through concepts that are rightfully practiced by professional money managers.

Below, Jay shares 5 key insights from his new book, The Investment 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 reflected in the mystery and opacity of capital markets, my book metaphorically traverses a vast desert, where crucial daily decisions can greatly or gravely influence financial fates. Looking up at the night sky in the heart of the desert, on the horizon in all directions, the stars brilliantly taunt our imagination. Scientists estimate that there are about 200 x 1024 stars in the universe. Research at Yale University found that the naked eye can only see about 9,000 stars on a cloudless night. Yet only a few salient stars were needed for nomads to navigate accurately through the arid deserts. With focused eyes, humans can conscientiously distinguish salient information from noise and translate it into meaningful decisions.

Start by having a plan. If an investor is inclined to invest on little information and divest on superficial price movements, it is likely that his best investment intentions will be overturned by gambling instincts. A 2004 article by Michael Mauboussin compared the expected results of the game in relation to the investment. In the shortest time, the results were nearly identical. However, with more time, the results clearly favored the investment. Indeed, the longer management teams can deploy value-creating decisions, the more the stock price ultimately reflects their efforts.

Realistically, each year there are only two to four weeks when stock prices make big moves. Whether it’s day trading or just nervous about the markets, if you find yourself sitting on the sidelines, you could be trading table scraps the rest of the year. Real investment requires time in the markets. Rather than spending valuable time, energy, and emotions trading stocks, build a core portfolio of quality stocks. Then layer three successive levels of value creation tactics where rewards can be directly justified for time spent. Eliminate the risk of investing by adopting a plan.

“In reality, every year there are only two to four weeks when stock prices make big moves.”

2. Research new investment ideas.

When gazing across the desert moors without a compass in hand, navigating to that next big stock could be near impossible. There are stock selection filters through which you can narrow down the universe of around 8,000 stocks to a few worthy values. Yet, for those less research-minded, sometimes it’s easier to simply follow more successful investors.

Check which stocks are traded by:

  • Super Guru Investors
  • The best financial bloggers
  • Top Wall Street Analysts
  • The Best Hedge Fund Managers
  • Company Insiders

3. Deploy a contrarian methodology.

Warren Buffet and Charlie Munger are known as the ultimate naysayers. They claim their best opportunity to add value is to wait for a discount. After the purchase, they rely on the underlying business management teams and Mr. Market to do their aggravating magic.

“Contrarian rebalancing can harness the real value of such predictable and unpredictable behavior.”

Still, being contrarian doesn’t mean spending countless hours scouring the markets for cheap basement stocks. Instead of looking for rare nuggets, I suggest six practical contrarian techniques that can be put to use immediately. One of them is contrarian rebalancing. Stock prices are constantly swinging due to the collective fear and greed of investors. Countercurrent rebalancing can harness the real value of such predictable and unpredictable behavior.

In an average year, growth stock prices will go up +/- 15%. Contrarian rebalancing exploits value by reducing and buying back stocks after these swings. However, we have set a higher discount target of 20% while maintaining the purchase target at a 15% discount. This asymmetric bias reflects the fact that the long-term market dance is inherently positive. Three steps forward, two steps back. Getting ahead sometimes means cutting off your advances.

4. Don’t overlook money-making tools.

Most investors are happy to own stocks that pay 1-3% dividends. Yet most are blissfully unaware that they could generate an additional 2-4% per year from these same stocks. Imagine owning a house for 30 years and never realizing you had a tenant in your basement who never paid rent? Writing covered call options against your core stock will generate this additional income.

As stock prices rise to higher prices, an investor can earn income by entering into a contract to sell current stocks in your portfolio, but at a much higher price for a very short period of time. When the underlying stock doesn’t reach that higher price by the chosen expiration date, the contract fails and the investor keeps the full premium – and you set all the terms of the contract.

The mere mention of an option contract might intimidate some investors, but it doesn’t have to be because this contrarian tactic isn’t complicated or risky. Indeed, by selling a covered call, you transfer the risk to a speculator. Every investor should learn how to exploit the incredible low-risk potential of covered call options. Those who don’t miss a lifetime of unearned income from this ground floor tenant.

“Every investor should learn to exploit the incredible low-risk potential of covered call options.”

5. There is a tool to overcome the should, want, could.

We’ve all regretted not buying a stock when it was cheaper, such as $90 Apple stock. Well, even though Apple stock recently hit $177, an investor can still submit an offer to buy Apple stock for $90, $100, $120…and get paid for it.

By agreeing to sell a $90 Apple put option for a specific time period (ranging from a week to 18 months), there are speculators who will pay you a premium for the very low chance that Apple shares can go back to that . lower price on the due date. Building additional returns on these low probability events is another way to create value in your portfolio.

The global fourth industrial revolution harnesses innovations through the fusion of humans, data and machines. The fifth revolution (invoking nanotechnology, biotechnology, quantum computing and AI) is on its heels. So with 3D, 5G, Augmented Reality, Virtual Reality (AR/VR) and the Metaverse coming of age, the future is downright exciting. While we can’t necessarily contribute to this vibrant future, we can at least own the companies that will make a difference.

Don’t let COVID fears, supply chain issues, high inflation or the war in Ukraine keep you from engaging in the markets. When we try to outsmart Mr. Market, we can miss the best two to four weeks of any year. The market waits for no one.

Moreover, investing is an opportunity to be a financial market activist. Better environmental, social and governance practices require your participation. Investing is voting for a world order you want to see. Like any great journey, it’s not just about the destination; it is also an opportunity to improve.

To listen to the audio read by author Jay Mason, download the Next Big Idea app today:

Hear key information in the next big idea app

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