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Commentary: Goldman Sachs textbook case of contrarian analysis in action
By Mark Hulbert, MarketWatch
Last Update: 12:01 AM ET Sep 21, 2007
ANNANDALE, Va. (MarketWatch) -- The time to buy, Nathan Rothschild famously said, is when the blood is running in the streets.
But how to put this apocryphal advice to actual use? What does it look like in practice?
For an answer you need look no further than what Goldman Sachs Group Inc. did in mid August, when it looked like the capital markets might dry up completely and the stock market appeared to many to be on the verge of a meltdown.
The blood most definitely was running in the streets.
So what did Goldman do? It invested $2 billion (that's billion with a "b") of its own money in one of its hedge funds that was hemorrhaging. See Aug. 13 story
The payoff? Its $2 billion investment has grown by a cool $320 million in the short time that has elapsed since then a 16% return in just one month.
In the newsletter arena, the closest analogy to Goldman's contrarian coup, at least that I can think of, is what the late Al Frank did on Oct. 20, 1987. Frank was the editor of The Prudent Speculator, and his letter's model portfolio, like most hedge funds today, was highly leveraged. (The newsletter is edited today by John Buckingham, who employs much less leverage than did Frank.)
And Oct. 20, 1987, of course, was the day after Black Monday, the worst single-day crash in U.S. stock market history, with the Dow Jones Industrial Average falling some 22%. Frank's highly leveraged portfolio fell 57% on that day alone, according to the Hulbert Financial Digest's calculations.
That's a whole lot of blood.
What did Frank do? Far from running for the hills, which was what almost everyone else was doing, he urged subscribers to buy.
That took guts, and his newsletter's ranking was amply rewarded for having them.
Since then, the Prudent Speculator is far and away in first place for performance among the newsletters tracked by the Hulbert Financial Digest. Over the nearly 20 years since Frank's post-Crash buy advice, the newsletter's portfolios have gained 3,857%, in contrast to "just" 825% for the Dow Jones Wilshire 5000 index On an annualized basis, this is the difference between 20.4% and 11.9%.
To be sure, opportunities such as the one facing Al Frank in October 1987, or the one facing Goldman Sachs last month, don't come along every day. An integral part of the job of being a contrarian is being patient, waiting for those occasions in which panic has come to dominate investor emotions and brought prices down to fire sale levels.
Being a contrarian is not for the faint of heart. But outsized profits can be earned by those who have the fortitude. End of Story
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980. |
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