Currently lacking a good book to read at night, I have returned to an off-the-run investment resource that I revisit from time to time. Last night, I came across a discussion of Japan’s currency in 2017, a topic I’m not particularly interested in. However, the author boiled it down to something that resonated with me. Though the author mainly referred to a long-term view on the Yen versus the consensus view that the Yen is a natural short due to Japan’s monetary policy, it may apply to most public security investing.
Most investors believe the correct approach to investing is to figure out what you think is going to happen in the future, and then position yourself accordingly. I don’t. I think you should figure out what other people think is going to happen, and then look for ways in which they may be wrong. This is because it is changes of opinion that drive financial market asset prices, not the future as it is currently envisaged. All the big money in markets is made and lost in the tails – things that people generally do not expect to occur that nevertheless end up occurring. You make money by being positioned to benefit from major changes in aggregate opinion. That is why (intelligently implemented) contrarianism pays.
Source
Put simply, the question to ask is: What is the public market pricing in terms of outcomes? And then, what potential outcomes that would cause a dramatic change of opinion could happen, that seem improbable and not priced in today?
One example that fit this framework is the one coal name we hold. When we purchased it in 2020, the global price for coal was in the doldrums, and there wasn’t any good visibility on when the industry might come out the other side, if at all. At the time, it almost seemed like a run-off investment at best. To compound matters, the name went down by 75% not more than a few weeks post-purchase.
Fast forward to today, and coal experienced an unexpected rocket ship ride (that has since come back to earth), and the company booked multi-year contracts to lock in volumes, something it hadn’t been able to do for a long time. It now generates roughly a 30% yield on cost.
I would never claim to have foreseen such an outcome. However, though with a less experienced mindset, I may have inadvertently provided myself with a cheap shot on goal for the outlook for such a hated name to change. And when the change of opinion happened, the tail opened up for the big money to be quickly made.