Tag Archives: Contrary Opinion

The ART of Contrary Thinking

When everyone thinks alike, everyone is likely to be wrong.

If you wish to keep from guessing wrong, learn to think contrarily.  –Humphrey Neill

CSInvesting: Humphrey Neill wasn’t advising to blindly go against the “crowd” but to think things through rationally.   For example, investors might be excited by the new invention of the air conditioner, but the second-order effects were more powerful like increase in demand for real estate in Southern cities in the USA.

The BOOK: NEILL(H_B_)-The_Art_of_Contrary_Thinking_(1985)

Critique of the book 2016-07-29_BR_ML

Contrary thinking in action….

Has Apple Stock Peaked?
December 3, 2012|by Timothy Lutts

Has Apple (AAPL) Stock Peaked?
In the Footsteps of Coca-Cola
The Next Apple?

Everybody knows Apple.
With more than 85 million iPhones sold, $156 billion in annual revenues and a market capitalization that recently hit $660 billion, Apple is the second most respected brand on the planet. Number one is Coca-Cola.

But what does that mean for investors?

It means there’s a chance that investor perception of the company is so high that all the big investors already own as much Apple as they can carry. It means there’s more potential selling pressure on Apple’s stock than buying pressure. And that means there’s a good chance the stock has topped!

Now, some investors, looking at numbers alone, will disagree.

They’ll point out that the company is still growing fast, that the third quarter saw revenues grow 27%, and earnings grow 23%, and that analysts are expecting 12% growth in 2013 and 18% in 2014. Then they’ll point to the stock’s forward PE ratio of 12 and say, “Apple is cheap!”

But using numbers alone is a mistake in evaluating growth stocks, particularly exceptional growth stocks like Apple.

For example, we at Cabot did very well recommending Amazon.com way back when the company (selling only books) was still unprofitable, and most bean-counters wouldn’t touch it with a 10-foot pole. We jumped on little Crocs (plastic shoes!) and rode it to the moon. And we did very well with ridiculously “expensive” First Solar, in part because we sold early, while its business was still booming, but its stock was on the skids. We could have justified owning none of those stocks if all we looked at were numbers.

Bottom line: to make money in exceptional growth stocks, you can’t just look at numbers; you’ve also got to look at momentum and sentiment.

But before I get deeper into Apple’s case, I want you to study this long-term chart of Coca-Cola (KO–see above) (the number one brand in the world today), spanning the years from 1965 to the end of 1985.  See at the top of this article.Note the earnings line, with each dot marking a quarterly earnings figure. It’s a steady uptrend, with the exception of a sharp dip in late 1974 and a stumble in 1981-1982. Then look at the dividend line; Coke’s dividends were increased every year, like clockwork. Finally, observe the price line, noting that Coke’s price peaked in late 1972 and didn’t exceed that level until late 1985, 13 years later.

The explanation for those “lost 13 years” lies not in the numbers; it lies in crowd psychology, and specifically, in the investing environment of the times. Coca-Cola was one of the Nifty Fifty, popularly regarded as one-decision stocks that you would simply buy and hold forever. (Others in this august group included Digital Equipment, Eastman Kodak, J.C. Penney and Simplicity Pattern).
Well, for investors who truly had the patience and guts to hold Coke through those lost 13 years, it worked out okay. But most investors don’t work with that kind of time horizon. Most investors can’t hold five years without seeing a profit—and they shouldn’t have to!

The truth is, the extreme popularity of those stocks (call it reverence, even), was a sign of their potential to top. But it was very hard for investors to see it then!
So, getting back to Apple, I’ve already mentioned the stock’s high regard among the general public; it’s the number two brand in the world. Among institutional investors, it’s regarded as royalty, providing both a dividend and spectacular growth. In fact, if you manage institutional money, owning AAPL has become almost a requirement in recent years, and the result of all that buying power is that even after the recent correction, AAPL is still up 45% for the year!
But when everyone who might buy a stock has bought it, what happens?
The same thing that happened to Coca-Cola in 1972.

It stops going up, and to some extent—every stock is different—it goes down.
Now, I have no doubt that Apple (the company) will continue to grow revenues and earnings for years to come. I’ve been an Apple user since 1987, when I bought a Macintosh SE for Cabot (to join our IBM Displaywriter—Google that!). Today I use a MacBook Pro, an iPad and an iPhone on a daily basis, and I expect to be an Apple user to the day I die, benefiting from the company’s legendary ability to make complicated technological interactions simple.

Nevertheless, I’m bearish on Apple (AAPL) stock today and here’s why.
There’s a dirty word to describe what happens when a company’s growth slows, and when the perception of the company’s future becomes just slightly tarnished. As that word spreads, and as those perceptions spread, the stock slowly collapses, as the supply of stock (potential sellers) overwhelms demand (potential buyers).

The Dirty Word
The word is deceleration, which is a fancy phrase for slowing down. And Apple is decelerating! That third quarter earnings growth of 23% followed second quarter earnings growth of 20%. Those were the slowest quarters since mid-2009! And looking forward, the projected 12% growth in 2013 is even slower, though 18% for 2014 provides hope.

Now, 12% growth is nothing to sneeze at; many companies would kill for 12% growth. And 18% is excellent! But it’s quite a comedown from the nine consecutive quarters from 2010 into 2012 where Apple’s earnings grew more than 50%! It’s deceleration.

And that brings us to the stock’s performance, which is where the rubber meets the road. Because more important than numbers, more important than sentiment, is the stock’s actual performance. So here’s Apple’s chart, since the 2009 bottom.

As on Coke’s chart, you see the earnings line, trending higher, but rounding somewhat recently; that’s the deceleration of earnings. There’s no dividend line on this chart; Apple’s dividend history is short but healthy. But there is another line on this chart and that’s the RP line. RP stands for Relative Performance; it depicts the performance of the stock relative to the broad market.

Note that over the past four years, whenever AAPL corrected, its RP line basically flattened out (ignoring the tiny weekly movements). But in this year’s correction, AAPL’s RP line turned down, and for eight weeks, AAPL performed worse than the overall market.

Now, this underperformance alone is not the kiss of death. Many stocks can pull out of similar corrections and move out to new highs.

But look back at Coke’s chart. If you look at the RP line, you’ll see the same pattern! From 1964 through 1973, KO was pretty healthy, beating the broad market overall, and holding its own in corrections. But after 1973, as sentiment turned, and the selling pressures slowly overwhelmed buying pressures, KO’s RP turned clearly negative, beginning a pattern that lasted many years longer than most investors could stomach.

And that’s very likely where AAPL is today.
So when you put it all together…
• The extremely high market cap
• The extremely positive public opinion
•The extremely high level of institutional ownership
• The deceleration of earnings growth
• The weakening relative performance line
…it looks ominous.

Now, big, well-respected stocks don’t collapse overnight. To the contrary; when a high-quality stock like Apple pulls back, you’ll hear a new chorus of “It’s a great value down here” and “Buy the dips.” But as time goes by, and the stock fails to return to its old highs, those choruses fade, and the stock falls slowly out of the limelight—just like Coca-Cola did in the 1970s.

Stepping back to look at the big picture, it’s worth remembering that investing is not a science. Uncertainty is a given.

But to be a successful investor, you need to put the odds in your favor, and today, the odds are not good for investors in Apple.  See more  http://www.timothylutts.com/


You might have sold out of a uniquely profitable company as AAPL went on to triple over the next five years!~


Greatest Trades of All-Time; Think Differently


‘How to think’:

It may sound peculiar that contrary thinking is required to achieve creative thoughts… This, however, becomes self-evident when we realize that thinking the way someone else thinks results in mimicry — a “copy-cat” requires the minimum of creative thought… Therefore, the inference is that to achieve any creativeness, some change has to be made. From this, it stands to reason that the optimum in creativeness must approach the maximum change… and the maximum change must be close to the opposite.

Zuce Kogan, Founder of the Creative Thinking Institute

1.      Rid Yourself of Nebulous Terms – Define, Redefine & Refine.

Unless you’re an orator or something it’s highly likely that nebulosity is your enemy. If you speak and think in vague terms, then simple, logical deductions are likely to evade you. But since life involves doing one thing or another, chances are that you’ll default to linking concepts in the ‘default’ way — the way suggested by the crowd. In that case it is likely that the succession of vague, emotive images will govern your action.

The power of words is bound up with the images they evoke, and is quite independent of their real significance. Words whose sense is the most ill-defined are sometimes those that possess the most influence. Such, for example, are the terms democracy, socialism, equality, liberty, etc. whose meaning is so vague that bulky volumes do not suffice to precisely fix it. Yet it is certain that a truly magical power is attached to those short syllables, as if they contained the solution of all problems. They synthesise the most diverse unconscious aspirations and the hope of their realisation.

Gustave Le Bon, The Crowd, A Study of the Popular Mind

Since eccentricity involves a capacity to deal with reality in a supposedly ‘odd’ manner and since the crowd deals mainly in vague images, one clear way to surpass them is simply to define the terms in which you speak and think.

This can seem daunting — especially at first. However, since the crowd remains ever-ponderous and dogmatic, it takes but a very small amount of clarity to achieve oversized gains. One need not plan out the redefinition of one’s entire vocabulary — just start with one concept that you use a lot in your daily life. I expect that the incentive gleaned from the initial reward will be enough to prompt further redefinitions and refinements.

2.      Allocate All of Your Available Resources Contrarily.

Contrary allocation of capital seems to be well-acknowledged as a key to success in certain investment and entrepreneurial communities. However, it also seems to remain compartmentalized as a theory about allocating capital and capital only – I say that if you wish to reach the honourable status of the ‘Mad Man’, it is prudent to apply this theory to all of the resources at your disposal:


Everything that should be managed lies here. Click to enlarge.


The truth is that you should allow your mind ruminate contrarily for more than just your money – but also for your time, energy and your attention. The integrated eccentric is he who doesn’t give up in any of these fields.

Whenever you are next faced with a seemingly trivial matter (such as whether or not to read a newspaper, take a taxi or express interest in an uninteresting matter) allow yourself to consider what the ‘common way’ is and just try the opposite.

3.      Adopt a Kantian Distaste for Intellectual Discussion & Stop Checking with Others.

Sometimes, if not most of the time, it is quite unnecessary to acquire the opinions of others before you act. Yet nevertheless I see a strong tendency for people to check and verify trivial and non-trivial matters with one another. This brings about two serious hindrances to the wannabe wacko; 1) it forces you to adapt your language to that of someone that is probably confused and using nebulous terms and 2) it will likely introduce unneeded emotions into your mind.
In order to acquire a sense of creativity I suggest that you act before you tell others about your actions and – in particular – adopt a Kantian distaste for intellectual discussion:

By and large Kant, unlike Socrates, avoided the company of philosophers and philosophically minded fellow citizens. He did this not because of any conviction that philosophers as a breed are inevitably frivolous or consumed by the need to prattle on about their most recent publications; some are, to be sure, and these one would seek to avoid in any case. He was certainly aware that in his field of study there existed colleagues with whom he could talk about bank accounts, ball games or battle plans. But philosophers tend to talk about philosophy. And even if such talk is motivated by infinite charity and fraternal goodwill, it provokes some response, comment or counter-argument to the ideas and theories presented. In print the same arguments have quite a different impact; they can be simply registered without requiring an immediate response, or can be interpreted to suit one’s frame of mind, and as a last resort a page can be turned and a book can be closed. But in conversation courtesy demands that the addressee react and relate himself. And this, in Kant’s view, is a dangerous exercise and one that certainly lacks the productive element that Socrates may have found in it. Philosophers, or so Kant thought, work best in isolation…

4.      Test Your Revelations in Small Ways. Proceed to Fail Small & Win Big.

So by now hopefully you’ve defined at least one term that has significance to your life, considered allocating your time, attention and money contrarily and considered doing something big without checking with anyone at all. Chances are that you may have thought of something interesting. The default consensual reaction is to elaborate a plan in a manner that requires significant resources (be that money, time, energy, attention or whatever else). I urge you to take a step back and consider how you might test it in the smallest possible way.

I’m always astounded by the degree to which people attempt to impose the property of permanence upon themselves. [facepalm] Why oh why? [/facepalm] Permanence through life is most frequently a large and onerous speculation — and indeed a type of speculation that is likely to be unattainable due to the ever-changing nature of each and every living individual. I suggest that if you wish to maintain your newfound eccentric temperament and demeanour, then risk little, lots rather than lots, little. If you risk little, lots you will not suffer the emotional turmoil that accompanies a large drawdown – and if you’re thinking contrarily you’ll likely be risking little for lots.

5.      Acquire Refined Senses of Ignorance & Stubbornness

The final step to eternal quirkdom is to maintain both a refined sense of ignorance and a refined sense of stubbornness. In the first instance, I should define my terms:

By ignorance, I mean a lack of knowledge. By stubbornness I mean an unwillingness to move from one’s intellectual position.

The former ‘sense of ignorance’ is merely a sustained application of point 2) about properly allocating all of your resources. By carefully selecting what enters your mind, you can maintain a temperament where you decide the content of your ignorance (or more precisely the content of your non-ignorance). This term – most commonly used as an insult – is in this sense quite neutral. We all must be lacking in knowledge (since we are not beings of perfect intelligence). Acquiring a refined sense of ignorance is merely rejecting the notion that the crowd should determine what you are not to ignore (and to be sure that determination is perilously nebulous anyhow!).

The latter ‘sense of stubbornness’ is merely the unwillingness to forego logic for the vague images of the crowd. Once again – it is a rejection of the crowd’s vague concept of when you should and should not give up your intellectual positions.

Recommended Reading:

[Full Disclosure: We adore these books and suggest them to everyone we know — but be aware that the links on the left are affiliate links. If you would rather not pass affiliate credit to us then feel free to use the links on the right.]

Free Book on Crowd Psychology: http://archive.org/stream/crowdastudypopu00bongoog#page/n6/mode/1up

http://greshams-law.com (A Great WebSite on Financial History)


Buy or Sell in May and Go Away?

My thoughts exactly: http://www.321gold.com/editorials/moriarty/moriarty051313.html