Are you really a contrarian?

Contrarian is probably one of the most overused labels in investing. Just about everyone likes to brag about how they went against the grain and made the call of the year or a lifetime. I think that there are probably significantly fewer real contrarians out there though. First of all, it's extremely hard to go against the crowd, in fact, it's against human nature. There are significant real and psychological rewards to going with the crowd. Secondly, going against the crowd often doesn't work out for the better. After all, you're betting against the the great mass of investors that move the market. Remember, John Maynard Keynes' famous line about the market can remain irrational longer than you can remain solvent? Raise your hand if you've lost money shorting a stock because your timing was just a bit off.

I'm going to list some of the great contrarian calls of the last decade. If you were in on them, than you're a far better (and richer)person than me.

Buying commodities in 1999.
Shorting tech stocks in 2000.
Buying AAPL in 2002.
Buying Chinese stocks in 2000.
Shorting Enron in 1999.
Shorting Lehman in 2008.
Shorting financials in 2007.
Buying the market in March of 2009.

Interestingly enough, Jim Rogers did three of these things. In fact, he was saying to short the money center banks back in 2006! That had to be painful, but ultimately very rewarding.

It's not easy being a contrarian. Think a little before you throw the term around loosely.

Freddie Mac gets the knife

Shares of Freddie Mac(FRE) hit the skids this morning. Fitch Ratings is has put the rating on their preferred stock on negative watch. This is not a downgrade. not yet at least. Fannie Mae(FNM) also got a haircut. Defaults are rising at both outfits. They are government sponsored-enterprises(GSEs). That doesn't mean that they are government-owned, but it does give them access to great interest rates and the perception that the government won't let him fail. I think that Uncle Sam will live up to this perception. At some point, another bailout is coming. These are the last bastions of liquidity in the housing market so everyone has a stake in them being healthy companies. I'm adding both these stocks to my watchlist. If they get under $20, then I'll pull the trigger.

Freddie Mac Conference Call

Dipping my toe in the E*Trade pool

After some more research, I've decided that the sky is not falling at E*Trade. Despite the kick in stomach it got from a full-page Wall Street Journal ad by TD Ameritrade, I know that the stock resembles Jan-Michael Vincent right now, but E*Trade is not down for the count. So far this morning, it's lost about ten percent. That's perfectly fine with me. I have no problem averaging down on this one. This company isn't going bankrupt. The only way it's folding is through a merger, probably with someone like TD Ameritrade. I don't see any better values out there. This stock is selling for half of book value. I know that more writedowns are coming in this sector, and maybe at this company. It's going to require patience to make money on this position, especially when things get uglier and the market as a whole is convulsing. It's these times of market uncertainty, when astute value investors step in and buy good companies for practically nothing.

Is it time buy the homebuilders?

Steve Sjuggerud is one of many contrarians floating this idea. In fact, he sees 500% gains in the sector over the next four years. He points out that after new home prices fell between 1979-82 and 1989-92, the shares of homebuilders soared. This is true, but this was also during a great bull market in general. I would love to know how an index of homebuilders did against the market during this same time period.

Time to look at Ethanol stocks

Obviously, this is a contrarian play. If you've read BusinessWeek, The Wall Street Journal, Slate or The New York Times in the last few weeks, you know that things are getting worse in the ethanol patch. Corn ethanol is a boondoggle, there's over overproduction, distribution is bad, cellulosic ethanol is years away. These are all very true, but I think that they'll work these things out. Let's face it, the corn lobby is too powerful to let the money spigot in Washington from being turned off just when things are getting interesting. Ethanol, in some form is here to stay.
So how do you make money from it? First, you have to wait. Let the problems get worse. Don't worry, they'll get worse before they get better. Then, there will be a rash of bankruptcies and consolidation. A few strong players will emerge. Invest in those companies, the acquirers, as opposed to trying to figure out who the acquired will be. Right now, I have my eye on Andersons Inc.(ANDE). This company is already fairly cheap(P/E of 14, P/S of 0.45). Andersons is actually more than an ethanol play; they also sell fertilizer, are in the railcar business, and they also sell home and building supplies. While the rest of the sector has been getting killed for the last year, Andersons is actually up 35% The company has little debt, so I think that it shouldn't have problems buying one its rivals once things really get bad.