“It’s hard to be contrarian and be popular at the same time,” Rick Rule told the crowd at the New Orleans Investment Conference last week. Most of the audience didn’t understand the nuance...

 

Rick was speaking from experience. His investment firm, Global Resources, was one of the very few boutique investment firms that survived the 20-year-plus bear market in resource investing (aka, mining). “I knew we’d do well, as investors, as soon as Merrill Lynch left the business.”

 

It’s no exaggeration to say that Rick knows every single important executive in the mining business, because for years and years Rick was the only person in the world who could raise a significant amount of money for a mine. Even so, back in the early 1990s, individual investors wanted nothing to do with him. He was virtually ignored at this conference in 1999.

 

Today, though, Rick’s a rock star. Dozens of fans follow him in the hallways. They mob him after every speech. And it’s standing room only, with folks spilling into the hallways, during his workshops. Rick’s popularity tells me this commodity correction has further to run.

 

You say you want an example of a great contrarian bet? Back in November 2002, Merrill Lynch got out of the high-yield bond business (junk bonds). Junk bonds had been in a bear market for four years… and nobody wanted to buy them. Merrill only makes money when folks buy, when investments are popular, which means that, by definition, whatever Merrill is pushing is probably a bad idea. Merrill is the herd, as its advertising suggests with its signature bull.

 

The head of Merrill’s junk-bond research team, Martin Fridson, was voted the best fixed-income analyst in the world for nine years in a row. He was the youngest person ever inducted into the Hall of Fame of the Fixed Income Analysts Society. Merrill fired him as it exited the junk-bond business. As Steve Sjuggerud told his True Wealth subscribers at the time, there’d never been a better buy signal for junk bonds. Steve recommended the Debt Strategies Fund, which is a leveraged junk-bond mutual fund. True Wealth readers saw 50% gains in about a year – in bonds!

 

It pays to be contrarian. But it’s not popular.

 

So… what did I tell the good people this morning at the New Orleans Investment Conference?

 

Well, first I gave them a contrarian litmus test...

 

“If you’re not long top-quality housing stocks, like D.R. Horton and Home Depot, you’re not a contrarian. The U.S. housing sector is without a doubt the most unpopular sector in the U.S. market… and maybe even in the world, right now. Accordingly, it’s dirt cheap. And, paradoxically, it’s safe.”

 

In the words of the Wedding Crashers, you could have heard crickets. The audience was dead silent. Nobody was interested at all. So, of course, I kept going...

 

“I’ve found over the years that a sure sign of a great investment opportunity is total apathy from a live audience. The quieter you guys are, the more confident I become of the likelihood of investment success...”

 

The audience laughed. But I bet none of them will buy the housing stocks.

 

I bet paid-up subscriber Tom Popplewell thinks he’s got me stumped with this one… He writes into our subscriber mailbag: “Perhaps you can answer the question I’ve heard often but I’ve never heard answered. If investment letter writers are so good at picking winning investments, why haven’t they already made their millions and retired?”

 

Porter Comment: Who says they haven’t? All of the good writers I know have made millions in the market, for clients or for themselves, dozens and dozens of times. But why would anyone want to retire from a job that’s this intellectually stimulating and this much fun? (Not to mention all the fan mail…)

 

More directly to your point, Jeff Clark and Steve Sjuggerud are both former professional money managers. I’ve been offered the job many times. I’ve always declined… Managing money is a different business than researching investments. You’ve got to hold your client’s hand, night and day. You’ve got to raise money. You’ve got to deal with an army of lawyers and accountants. What we love to do is research investment ideas. Newsletters allow us to focus on that, to the exclusion of almost everything else.