There are many strategies in the world of investing, how to buy low and sell at a high price and one of the strategies is The Contrarian method as described by Benj Gallander in The Contrarian Investor’s 13 published by Viking Canada, Toronto, 2002. The author writes the Contra the Heard Investment letter and have been doing so for over 15 years. The title of the book refers to 13 rules which will help you to invest or examine companies that are undervalued and should rise in value over the coming year or two.

Rule 7 is Never Use Stop Losses. Stop losses are devices that will trigger prices to get out of the stock. The problem is the stock tends not to act rationally and if there is a wild swing or larger swing in prices than you anticipated the price you were thinking of exiting is not the price you actually exit at. A better idea is to maintain a diversified portfolio with no single company greater than 10% of your portfolio. If something goes down 10% in value, review the reasons why you bought it and do they still stand? Focus on where the stock is going from where it is and what are the alternatives you could be investing in.

Rule 8 is Look to Hit Home Runs in the Stock Market. When you buy, what is your expected return? If you aim for 400% and get 100% that is still good. If you aim for 4% and gain 2% have you done that well? Most professional investors lose money of 40% of their trades, but they hit home runs on a few and that makes up for the others – let the profits run is a good thing to do.

How to decide which companies fit or where to look for homeruns?

The Contra method starts with companies who have fallen 33% in one year or have an upside of 50%.  Once you have the list, the next step is eliminate those over $25 a share. If you are after capital gains stocks between $10 and $25 is easier to achieve it.

The next step is to eliminate those companies who have not been listed on the stock exchange for 10 years. This does a couple of things – it allows you to investigate further; it allows you to have the expectations the shares should go up it is a matter of when or does the company need to do something – get debt under control? meet new competition? commodity cycle?

The names need to be decided how many shares would you being willing to buy? Contra uses what they call a Point Tally System but it can be adjusted to meet your requirements.

Stock Watch List – which are the good potential or alternatives.

Price is what you pay, value is what you get.

Rule 9 is the Search for Beautiful Black Swans.

At Contra they use $25 minimum, but that can and does include blue chip stocks which have rebounded. It is noted that when blue chip stocks run into serious trouble, they will fall from inflated heights, particularly during downturns when they tend to fall the most. This is when it is important to decide do they rise again or why did they fall?

It used to be that you need to use the post office for information to be sent to you, now we have the internet and access to great amount of information including SEDAR and more information will be seen on the exchanges you trade on.

Rule 10 is the Develop the Ten-Day Buy. During December is the deadline for tax-selling, which means if you sell your losers you can offset them against your winners. The deadlines tend to depress stock prices which means it is a great time to buy. After the deadline passes, stocks in general tend to rise at least a 1/4 of a percent.

More in tomorrow’s post

Linking to dividend paying stocks, with the Contra Method, a process or ability to narrow the selection is always the key. The contra method is about stocks under $25 but you can change it to whatever you wish. If you start with those that pay a dividend, and expected to continue, you will find a wide variety of companies. Sometimes the capital gain will be a factor in investing, sometimes the dividend but with the dividend it is about protecting your investment as well as getting paid.

There are more questions than answers, till the next time – to raising questions.