Resource World Magazine

s p e c u l at i o n s L eon ard M e lma n Time for contrarian investing? O ne of the most interesting investment concepts subject to debate over the decades is the idea of "contrarian investing." Simply put, the idea refers to investing against the general movements of the majority. In point of fact, majorities have been decidedly wrong so often that it is easy to recount numerous specific examples, most notably the era of the 1920s when millions opted twice to follow the consensus leaders with results that turned out to be devastating for many. In 1920, America appeared to be a nation doomed to decades of economic trauma and poor performance. Much wealth had been expended in fighting World War I. Millions of soldiers were returning from that war without either jobs or favourable prospects. From 1920 through 1921, a depression of startlingly discouraging depth afflicted America, Canada and other nations. With this background, the general consensus was that the name of "idiot" should be given to anyone who bought or recommended buying securities – and yet, there had never been a greater, more opportunistic time for securities investment than the one which took place during 1922-24. The Dow Jones Industrial Average stood at about 90 in mid-1924 and soared without a single meaningful interruption to 380 by September 1929. This four-fold increase in the Dow, combined with ultraliberal margin rules of the era, enabled huge fortunes to be made from those early investments. By 1928 into early 1929, the world was agog with investment tips – virtually all on the positive side. Not only securities, but it seemed the entire society was en route to endless prosperity and the era was dubbed "The Roaring Twenties." Within that environment, anyone who, in early to mid-1929, suggested getting out of the 24 www.resourceworld.com markets or even – gasp! – shorting them was likewise referred to, but in the opposite direction, as idiots. Unfortunately for the platoons of optimists, the Roaring Twenties came to an inglorious end, fortunes were smashed for the majority and tales of stock losses became the stuff of American literary lore. By 1932, ruined stock investments lay like so many shattered pieces of glass in the gutter. However, there were a few contrarian souls who looked around, saw that prices had stopped declining and, for various reasons, began to acquire new investments; people like Bernard Baruch were destined to become legendary as his contrary stands to divest in 1929 and acquire in 1932 were acknowledged – in hindsight – to be brilliant. Baruch noted that he based his decisions on the unreliability of crowd behaviour, noting, "...Anyone taken as an individual is tolerably sensible and reasonable – as a member of a crowd, he at once becomes a blockhead." Events, similar in nature if not in magnitude, have occurred from time to time in many realms of investing. One can easily recall the computer leasing fad of the early 1960s; the dominant general market pessimism at precisely the wrong time in late 1974 prior to the grandest securities bull market in history; the wild precious metals optimism in late 1980, just prior to 20 years of predominantly negative performance and the .com frenzy of the latter 1990s. And now, there is a new question at hand. The junior mining shares have been beaten down and abundant logical reasons for continued poor performance are at hand. Aboriginal land claims problems abound; regulatory agencies are making unending and expensive demands; metals prices are in general decline rendering many possible projects no longer potentially profitable; gold and silver have failed to respond positively to the many crises which are reported almost daily in print and electronic media and "everybody" knows that the era of gold responding positively to bad social or economic news is over. And yet, if one takes the time to think, one might recognize that the underlying problems which have historically led to metals bull markets still abound. Governments around the globe are printing money on a scale without equal in history; debt/GDP ratios are expanding in nation after nation; terrorism is once again on the rise and political polarization is taking place at an astounding level. These and other situations indeed exist, but they are hidden from view by the majority clamor. The question, then, is whether the public clamor is correct and junior shares should continue to be avoided – or whether this is one of those historic times when the contrarian could be in the process of being handed a once-in-a-lifetime opportunity for outsized capital gains, when quality issues can be picked up for pennies on the dollar. I can only suggest for investors to properly perform due diligence and consider their future investment decisions based at least partially on an understanding of the past projected into the future. n This material is taken from sources believed to be reliable and is provided for information only. Any investment decision should be made only after prior consultation with investment professionals. Leonard Melman is a financial and political writer who focuses on issues relating to the resource sector. Mr. Melman lives in Nanoose Bay, British Columbia, Canada and can be reached at lmelman@ shaw.ca november 2013

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