Book review: The contrarian investor’s 13 – Benj Gallander
Penguin Canada, 2002-2004
Gallander is a Canadian author of a stock investment newsletter. He is often appearing in the media (Bloomberg, the globe,..) to express his views on the stock market. Just Google his name or youtube him. He seems to be a contrarian person by character. He likes to be cynical about the general investing community, he has his own very particular view on things. Most importantly, he runs his own investment newsletter, “Contra the herd”, link here.
You have to admit, a 27 – year track record, with an average annual return of 23 % (CAGR 19.6 %) is very impressive. This is the return before expenses (broker,..), including gross dividends, and before any taxes. And without any fees for the portfolio management or subscription fee. Still, who can deliver a 19.6 % CAGR over 27 years?
This is how his track record compared to the S&P 500, dividends included:
In this book Gallander basically explains his method. It comes down to this:
- search for stocks which have gone down a lot in price. At least 50%.
- these companies are very often in trouble. There is a reason why they are so much down. Start doing your research and filter your stock set to reach a shortlist of companies where you can expect a turnaround. Do deep research on their financial position (debt!), their sales /earnings / income /cash flow potential, and lots of other evaluation criteria.
- once you found companies beaten down for an understandable reason but capable to do a turnaround, add them to a watchlist.
- maintain the watchlist, watch each candidate for 6 months or longer, until you are certain about not losing your investment if throwing money at it.
- determine a sales price before you even purchased the stock. This sales price should be >> 100 % higher than your purchase price. You don’t risk your money to get 10 % return.
- purchase the stock and wait until it reaches its pre-determined sales price. This could take a long time, typically years. But this long waiting time doesn’t matter since the sales prices is set to have hundreds of percent profit.
Obviously, there will be mistakes / unhappy developments, since he is looking at companies in distress. So once in a while (10 %? 20 %? of his picks) things go miserably bad, the company fails from all sides, and he sells at a loss. Often that is a big loss.
So his tremendous track record is a combination of huge profits (100-200-300-400%) on some positions, profits acquired over years of holding, and a number of complete failures, often resulting in a 50% to 100% loss. And probably some in between which go nowhere (say 0 %).
The big extremeties in return- some huge successes and some huge losses (but more of the first kind) also explains why his annual portfolio returns are jumping wildly up and down. The standard deviation on his annual retuns is 27 %, while the S& P 500 standard deviation is 17 %. Which doesn’t matter if you are an investor for the long term, because then you only look at your average returns. Who cares what happens in the middle of your investment horizon?
The book is challenging a number of common beliefs on investing in stocks. I can agree with most. Some of his arguments are new, such as the preference to buy stocks with a low price (not low because cheap but low absolute number, say lower than 10 $). Many institutions cannot purchase a stock with a price below 10 or 5, so there is an opportunity there. There are lots of similar ‘contrarian’ considerations in his system.
All in all an interesting read.