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Smart Money
The Smart Profits Report: Issue #453
Wednesday, September 5, 2007
Smart Money: The Best Way To Blaze Your Own Money Trail
By Marc Lichtenfeld
Senior Analyst, Mt. Vernon Research
I guess my working life started when I was 10, shoveling snow off driveways. It continued in high school when I toiled in an ice cream shop and a tuxedo store after school and at weekends. Don’t get me wrong, it wasn’t child labor or because my parents wanted me out the house; they were both hard-working teachers and it was actually through their strong work ethic and example that I learned one of the most valuable life lessons.
Through my parents’ example, I understood the need to work and earn what I had. And when I saw the fruits of my labor, I had a valuable lesson ingrained in my brain from an early age: The value of a dollar and how to be responsible with my money, in essence, making smart money.
To this day, I haven’t purchased anything I can’t afford. Sure, we were offered crazy loans that would have enabled us to move into a McMansion. Nice? Yes. Practical? Not really. My current house is large enough for my family and more importantly, I can sleep at night without worrying about how I’m going to make the mortgage payments.
That’s not to say we don’t have nice things. When the 27-inch television that we bought in 1995 finally blew (I’d say we got our money’s worth there!), I took my first plunge into the high-def world this weekend…
Smart Money At Work - High-Def At A Low Price
Remembering the smart money life lessons I learned as a kid, I resisted the temptation to follow what everyone else is doing and buy the biggest, flashiest set available. Instead, I got an excellent price on a great TV - the same one that my neighbor paid $500 more for just four months ago, but is reduced now as buyers flock to newer models.
The point is, a strategy like this leaves you with more money to invest in other areas - one of those being investing itself. Using the same approach that I do when buying big-ticket items, I look for stocks that are either under-the-radar, out-of-favor, or undervalued.
In his book, “Contrarian Investment Strategies: The Next Generation”, David Dreman, the father of contrarian investing, cites numerous statistics showing how out of favor stocks outperform the markets. For example, over various time periods, stocks with price-to-earnings ratios in the lowest quintile consistently beat the overall market by over 300 basis points.
Discovering stocks that other people don’t want, or aren’t paying attention to, is an excellent way to make smart money - as I’ve discovered first-hand…
A “Dynamic” Company With Dynamic Profits
In March 2006, I recommended shares of Dynamic Materials (Nasdaq: BOOM) to readers of TheStreet.com. The firm isn’t exactly in a business that gets the pulse racing - it clads metal together to make a stronger metal, with its products used in places like oil refineries and ships.
While it might not be exciting, it’s certainly profitable. But nobody else seemed to notice that the company boasted strong earnings and cash flow and a healthy balance sheet. When I issued the recommendation, shares were trading just under $33. Today it’s at $43 - a tidy 30% gain in 18 months. That compares to a 13.6% gain in the S&P 500 during the same period.
Smart Money: If You Want To Gain, Go Against The Grain
Today, I make stock picks like this for Xcelerated Profits Report subscribers - stocks that most people don’t want, or won’t bother looking at. And yes, when you’re comparing your portfolio with someone else’s, you might get blank stares when mentioning the names of your stocks. Some folks may even ridicule you for owning such a dog.
But that’s OK. Few people ever got rich by following the crowd. While they chase the “exciting” stories or blindly follow the analysts’ stock ratings, remember that the upside is relatively limited on the big names. On the other hand, the sky is the limit for your undiscovered or out-of-favor stocks with big potential for making yourself some smart money.
So while it might be difficult to go against the grain in life and the stock market, those who do are usually richly rewarded.
Hoping your longs go up and your shorts go down,
Marc Lichtenfeld
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Today’s Smart Profits Action Center
- While developing a contrarian investment strategy will help you succeed in most cases, you still need to make sure that your theory is correct, so you’re not just branching out for the sake of it. Fortunately, there are various tools you can use to help you. For example, is sentiment on an idea or stock heavily tilted one way or the other? If so, you can play the alternative side when reality sets in. Are investors confident or nervous? Using tools like the CBOE Volatility Index (^VIX) can help you steer clear of the crowd.
- “It’s The Ultimate Contrarian Play… And We’re Going To Profit Before Anyone Else.” So said Mt. Vernon Research Investment Director Karim Rahemtulla in the July issue of the Xcelerated Profits Report. And profit he did. While everyone else chased upside gains from the Chinese market, Karim gave readers a way to play the downside. Just five weeks later as the Chinese market slumped, the value of adopting a contrarian investment strategy proved its worth yet again, handing readers gains between 40% and 112%. Find out how you can get on board and cash in on the next opportunities - and win on 80% of your trades… guaranteed.
Related Articles:
- Contrarian Investing Strategy: The Most Profitable Way To Invest In 2007
- Investing Strategies: Enjoy The Pleasure Of Option Investing Without The Pain Of Speculating
- Stock Market Trading: Two Ways To Eliminate Ill-Advised Stock Investments
