Like revenge, compelling investment ideas are often best served cold. When a stock's price has hit the skids, smart shoppers can stroll the blue-light aisles snapping up bargains. And these days there appear to be plenty of 'em: Merrill Lynch
With individual stocks, though, the tricky part is determining whether a company has sold off for reasons that aren't related to fundamentals, or whether it's cheap for good reason: an important product launch has flopped, say, or the company has seen a steady erosion of its market share. Dwindling levels of free cash flow (FCF) should cause crafty types to raise an eyebrow -- probably two -- and bring out a shovel: Even if the price seems right, you'll need to dig through the company's financials to determine whether it's a worthy investment.
Spotting the difference between values and value traps can be a full-time job. And while contrarian investing can be a smart way to build wealth, those who pursue an against-the-grain strategy should be prepared for plenty of scrapes along the way: Volatility is basically built in to this approach.
Smooth the edges
Which is why mutual funds are the best bets for contrarian investors. The advantages include:
- Smart diversification -- With well-chosen funds, your nest egg won't crack up when one or even a handful of companies hits the skids.
- Convenient asset allocation -- Unlike individual stocks, funds make it easy to round out your portfolio's exposure to areas of the market -- such as international equities, say -- where researching individual companies (and country-specific accounting standards) could be time-consuming.
- Low costs -- The typical mutual fund charges too much and underperforms. But plenty of cheap and compelling options exist.
The cranky cheapskate
Indeed, the average price tag of the funds we've recommended to members of the Fool's Champion Funds is around 1%, and more than 90% of them have made money for shareholders since being tapped for the newsletter. And here's an item that may pique the interest of your inner value hound: In the July issue of the newsletter, we uncorked what we're affectionately calling our "Cranky Portfolio," a lineup of exchange-traded funds that, taken together, weigh in with an expense ratio of roughly 0.20%.
We'll rebalance this portfolio on a quarterly basis so newcomers can join the fun. And when we rebalance, we'll harvest our winners and favor those areas of the market that have underperformed -- all the better to make good on that old investing chestnut: Buy low, sell high. So if, like me, you're a cranky cheapskate -- and I mean that in the nicest way -- click here to take Champion Funds for a risk-free spin.
This article was first published July 6, 2007. It has been updated.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service and co-advises Motley Fool Green Light with his pal Dayana Yochim. At the time of publication, he didn't own any of the securities mentioned above. Home Depot is an Inside Value pick. Moody's is a Stock Advisor recommendation. You can check out the Fool's strict disclosure policy by clicking right here.