Model Portfolio Performance 3/5/2021, Member Compliments, & Understanding The Bigger Picture

  • 2021 year-to-date Model Portfolio performance has been exceptional, following a banner 2020.  In aggregate, our model portfolios have trounced the S&P 500 Index since their December 2015 inception.
  • Through March 5th, 2021, the Best Ideas Model Portfolio was up 36.8% YTD, ahead of SPY’s 2.6% YTD return.  The Best Ideas Model Portfolio was higher by 51.1% in 2020.
  • The Stuck On Yield Model Portfolio is higher by 28.0% YTD, and this Portfolio is now ahead of the S&P 500 Index since its February 21st, 2020 inception.
  • Our long/short model Portfolio, which we call The Contrarian All Weather Model Portfolio, is up 19.7% in 2021 through March 5th, 2021.
  • Last, but not least, Uncle Tony’s Model Portfolio, which was funded in August of 2020, has gained 32.7% YTD in 2021, and is ahead of SPY by a greater amount since inception.

“On the day that I die, I wanna say that I, Was a man who really lived/loved and never compromised.”

-Zac Brown Band from Day That I Die


First, I want to say thank you for the folks along this journey, which has not been an easy one. even though it has been a very profitable one for those who had the endurance, patience, and fortitude to stick with positions that were very different than the broader market indices. Second, last week, for the week ending 3/5/2021, we saw another banner week for our targeted equity positions and our model portfolios.

Occidental Petroleum (OXY), which I wrote about in this hotly debated “Too Cheap To Ignore” article, which was published on August 7th, 2020, saw its shares gain 17.4% last week (they are higher this week too).  Since I wrote that article, OXY shares have gained over 100%, as of this writing, ahead of the SPDR S&P 500 ETF’s (SPY) gain of 18% over the same time frame.  

Building on the narrative, OXY shares sport impressive free cash flow yields at today’s prevailing oil prices.

Continuing the narrative of out-of-favor energy companies, Exxon Mobil (XOM) shares, which are also featured in the table above, gained 12.1% last week, for the week ending March 5th, 2021.  Since Exxon Mobil was removed from the Dow Jones Industrial Average (DIA) on August 31st, 2021, its shares have significantly outperformed (CRM), which replaced Exxon in the DJIA.

I wrote about this outperformance in a public article published last week, titled, “Exxon Mobil Far Outpacing Since It Was Removed From The Dow“.  This article was a follow-up to one of my favorite articles I have written, which was titled, “Exxon Mobil Exit From Dow Reveals S&P 500 Index Structural Flaws.” 

Also contributing to the outperformance last week was Antero Resources (AR), which I cover prominently in our dream scenario member articles at The Contrarian, and in a series of private and public research, including this recent article, saw its shares gain 9.8%.  As I write this post, Antero shares are up 92.8% year-to-date in 2021, after gaining 91.2% in 2020.  Members at the Contrarian have documented gains, for those who have reported, of over $80 million in Antero Resources alone.

There were many other equities that contributed to the positive model portfolio performance during the week ending March 5th, 2021. These included Devon Energy (DVN), whose shares gained 18.9% last week, Cenovus Energy (CVE), whose shares gained 10.8% last week, BP (BP), whose shares gained 9.7% last week, U.S. Steel (X), whose shares gained 9.3% last week, and whose shares are up over 111% versus a roughly 10% gain in SPY since I wrote the public article, “U.S. Steel: Too Cheap To Ignore Again“, on November 13th, 2020, Chevron (CVX), whose shares rose 9.0%, and Antero Midstream (AM), whose shares rose 7.3% last week, after being the best performing midstream firm for much of 2020.

There were a host of other equities that contributed to strong model portfolio performance, including quite a few financials, led by Barclays (BCS), whose shares gained 8.2% for the week ending March 5th, 2021, and Brighthouse Financial (BHF), whose shares rose 5.5% last week. 

These are just a few of the equities highlighted that we cover, and who contributed to the positive performance. There were down weeks too, for stocks like First Solar (FSLR), whose shares fell 9.0% last week, RH (RH), whose shares fell 8.4% last week, yet are higher by 1383% since we bought these in the long/short Contrarian All Weather Portfolio in October of 2016, and Brookfield Renewable Partners (BEP), whose shares declined 8.1% last week.

In summary, a historical capital rotation is in full bloom, something I have outlined privately, and publicly.

Understanding the bigger picture, then having the understanding of the bottom-up fundamentals (link to an important member article) has been the key, and it has not been easy, yet that is where the historic opportunity has been, and that is where it still stands, from my perspective.

Model Portfolio Performance Through March 5th, 2021

Bet The Farm Model Portfolio

  • 2021 – Up 69.1% YTD (this portfolio has been all cash for a little while now)
  • 2020 – Up 161.1%

Best Ideas Model Portfolio

  • 2021 – Up 36.8% YTD
  • 2020 – Up 51.1%

Stuck On Yield Model Portfolio (Inception February 21st, 2020)

  • 2021 – Up 28.0% YTD
  • 2020 – Down 6.0%

Contrarian Long/Short All Weather Model Portfolio

  • 2021 – Up 19.7% YTD
  • 2020 – Up 13.3%

Uncle Tony’s Model Portfolio (launched August 21st, 2020 for a family friend with $650k looking at retirement)

  • 2021 – Up 32.7% YTD
  • 2020 – Up 12.4%

For perspective, the SPDR S&P 500 ETF is higher by 2.6% YTD in 2021 (through March 5th, 2021), and finished higher by 18.3% in 2020. For additional perspective, it has not always been rosy, particularly from 2017-2019, yet perseverance and understanding the bigger picture, along with bottom-up fundamentals has led to extremely strong relative and absolute performance since the inception of the model portfolios with the Bet The Farm & The Best Ideas Portfolios dating back to December 7th, 2015.

Member & Future Member Compliments

The success of others has been extremely gratifying to watch happen in real time, with a lot of naysayers drifting aside, yet still a fair amount of skepticism and criticism remaining.  The following are a couple referenced newer member compliments and a couple of member compliments from 2020.

Exceptional work

Unquestionably one of, if not, the best services on SA. The latter is what I’ll go with. That said, if you can’t have conviction in your thesis and ride (and add) when prices are working against you, this isn’t for you. Very grateful for this group and the community Travis created.

– Posted As A Formal Review On January 24th, 2021

Life changing

I have never written a review of an investing service, although been on the receiving end of many over a number of decades. The Contrarian stands out alone among them all. Travis brings integrity and intellectual honesty and deep and relevant experience, none of which I have found anywhere else. His insights are so perceptive that my lack of such vision caused me to take a high powered magnifying glass to his description of AR. I was highly skeptical and slow on the uptake. What I found, and reconfirmed from multiple angles, allowed positioning in March/April which has been life changing. Ideas presented are well worth investigating. Chat is incredibly helpful and noise free.

– Posted As A Formal Review On January 21st, 2021

Separate the Forest from the Trees

Travis is one of the best writers on SA in my opinion. He stays true to his value orientation and contrarian roots and has guided his subscribers towards very profitable investments through the years. In addition, the group of contrarians are active in sharing ideas, analysis and investment philosophy which are valuable to both beginner and expert investors alike. One word of caution, this is not a service which will provide daily trade ideas / signals nor dozens of in-depth single stock research (although key focus investments are covered in great detail); it is however an invaluable resource to gain insights in undervalued sectors, understand deeper industry and company fundamentals and ultimately unearthing deep, multi-bagger value investment ideas. It is not hyperbole for me to say that this service has changed my life. Absolutely worth the subscription 10x over.

– Posted As A Formal Review On January 19th, 2021

Beconan Premium Comments2

@KCI Research Ltd.

I want to thank you for your timely article on 2/19/2020 Antero Resources is A Generational Buy. Your article helped me reached a conclusion that AR would not file for BK. Soon after studying your article carefully, I started betting my farm ( funds from all my IRA accounts) on AR. 1/3 @1.83, 1/3 @1.40 and 1/3 @1.30. I accumulated about 500,000 shares of AR. Then AR fell to all time low of 0.67. A thought of cutting loss flashed in my mind. I overcame the fear eventually and stayed all the way up to now. Lately I ask myself where should I get off the moving train. Most target price mentioned is $17, some say $26, a new number mentioned is $50. I am going to try to get to $35 which is about 1/2 of all time high. I do not know if we can get there or not. I worked for McDermott for a year in 2002, a thousand dollar company matched stock in my 401K account grew to over $30,000 as company stock went from single digit to over $100 in a few years. That personal experience also helped me to decide to bet the farm.

You helped me and my wife to be able to retire comfortably and help my children go to Universities. Thank you so much. I will be your The Contrarian subscriber soon.

– Posted January 13, 2021

myk3077 Premium Marketplace Comments96

@ KCI research… I have been a member of your investing service for a couple of years. I want to share with everyone that Travis’ research going all the way back to 2018 is unbelievably outstanding. My knowledge has grown 5 fold in the space just from pouring over his previously published members only articles. The valuation work and detailed analysis of individual basin characteristics is second to none and to be honest.. is better than many professional energy consulting firms research reports i have read over this time. Simply put… Travis will probably be the single largest reason why i am able to retire early… His service is invaluable..and it doesn’t matter if you disagree with his research.. just having it to offset/make better investment decisions is the idea. There is nobody better at his size in the industry… The fact that unaccredited investors have access to him is truly unbelievable.

– Posted January 13th, 2021

And I want to thank you for the research, without which I wouldn’t have the conviction to concentrate my portfolio. It is up more than 200% this year. Very likely I will be able to retire in the coming year.”

– Member compliment received December 15th, 2020.

I have accumulated over 96K shares from MAR 10th until 2 weeks ago (in Antero Resources shares). My average price is $1.67 (the stock was trading recently around $5 per share). KCI research is the reason for this… Its about the thoroughness of research that led me to have the conviction to jump in.. I simply added his analysis coupled with understanding the ramifications of the oil price war and Covid on the Energy Sector. I wrote this to thank KCI for his insight, research and investing service which is outstanding.”

– Member compliment posted here on December 8th, 2020.

Before 2020, I thought it would have been crazy to pay over $1,000 for a subscription. Yet after reading one of Travis’ articles and a 2-week trial, I realized that the value offered here, vs other services, is substantially greater. I initially subscribed to The Contrarian for knowledge and if I made money, then great; I’ve become a better investor due to this close-knit group and the return potential has been far more extraordinary than I imagined coming into this year. The crazy thing is that things are just getting started, as financial markets are at relative extremes, rarely reached historically, according to The Contrarian’s analysis. Travis is not your typical go-with-the-flow investor, hence the group name, The Contrarian. The group focuses on the most undervalued sectors of the market that have outstanding growth opportunities and while our gains have been extraordinary this year, I am still in awe of the enormous future return potential. Here, you will find many highly competent investors contributing towards a variety of topics that will leave you learning something new every day. If you are looking for an author who is competent, respectful, formally educated, and thinks outside the box, then give The Contrarian a try – I’m glad I did, and my portfolio is happy too.

– Member compliment posted as part of a formal review on August 27th, 2020

Thanks for your input Travis. I must say you do have a very pragmatic and calming way of framing things and make some really good points. I don’t think I have ever come across anyone with so good hand holding skills regarding stock investments.”

– Member compliment posted on August 22nd, 2020.

“I completely agree that Travis’ style is calming, professional, poised and (positively) unique. It’s Travis’ style and professionalism (especially responding to rude responses in public articles) that really distinguished him (besides good research and a shared contrarian view) and attracted me to The Contrarian.

Travis enables counterpoints to be shared and, as he’s done here, actually encourages it. Iron sharpens iron and an echo chamber is dangerous. Many of us have very (probably irresponsibly) high portfolio percentages allocated to our favored names so I think it’s important for us to continue enabling these questions and this dialogue.

– Member compliment also posted on August 22nd, 2020.

I think of you as the Wayne Gretzky of analysts. A couple things I remember you saying that have happened – PM’s would lead the way higher for commodities in general, then E&P stocks would lead the way up before the underlying. We’re starting to see some strength in natural gas here recently. Things are looking pretty darn good to me.”

– Member compliment received on August 11th, 2020, and as a sports fan for most of my life, I appreciated the context.

The investment commentary is first rate. Also, Travis has expert knowledge of the natural gas industry and specific high potential stock picks in this area. (Lots more besides.) All this builds confidence in his stock picks. Another real plus is the member chat area, which is full of really excellent ideas, observations, forecasts, etc. Am grateful to the lords of investments for allowing me to discover The Contrarian.

– Member compliment was received on August 8th, 2020, and this was also posted as a formal review.

I’ve been a subscriber to KCI’s research service and all I can say is that I wish I had done so sooner. Definitely the best of the 4-5 I’ve tried so far.

– Member compliment was posted on August 7th, 2020.

Having spent my career as a market research analyst, being surrounded by competent analysts, I observed what we might call the “analyst fallacy”. Indeed, I subscribed to The Contrarian despite a high price compared to other Seeking Alpha subscriptions, because it is explicitly anti-herd or orthogonal to the herd. Indeed, the more I study it, the more I find The Contrarian subscription price to be a relative bargain.

– Member compliment posted in a series on July 30th, 2020.

As I like to say, the feedback, positive and negative, indicates that I am headed in the right direction with The Contrarian.

Closing Thoughts – Perspective & Perseverance Are Needed

All the detailed spreadsheet models in the world are not a substitute for understanding the bigger picture, being able to position ahead of a move, and being able to look forwards instead of looking backwards or look forwards instead of focusing on the present situation. Ideally, getting the “macro” and “micro” right is what you want, however, this is hard to do in practicality, and there are going to be unexpected twists and bumps along the way. Said another way, investing is a full contact sport, and you have to be prepared for the mental and physical capital challenges if you want to materially outperform.

Ironically, right now, the best thing most traditional investors could do, meaning those that focus in traditional stocks, bonds, real estate, etc. is to take a vacation for the next seven years. I will be expounding on this topic more shortly (update, which I did here, and it is important to read the closing paragraphs for the true conclusion). Alternatively, investors who want to stay in the game should consider non-correlated and alternative asset classes.

For now, I am going to close with the same refrain I have been hammering in with these blog posts.

Many investors operating in the commodity equity arena have had to run a long/short portfolio to simply survive the past seven years, however, the irony today, is that the most operationally leveraged companies, which are generally the short positions in these aforementioned long/short portfolios, have the most upside return potential at historical inflection points.

We are seeing that right now, and two specific public examples that I have highlighted include U.S. Steel (X), which I wrote about here, and Occidental Petroleum (OXY), which I wrote about in this public article. If those two are too high octane for you to look at as a investor, consider Wells Fargo (WFC), which has some of the same out-of-favor characteristics, as I detailed in this recent article.

In summary, investors chase performance, that is just part of human nature, and many investors are chasing performance in the hottest sectors today, including the technology sector, even though energy equities (XOP), (XLE) at a broad lever are outperforming technology equities (XLK) over the past four months by a substantial margin. Having said that, market participants will generally not consider the out-of-favor equities today, even acknowledged industry leaders, until they have a long-run of outperformance.

I witnessed this first hand with Realty Income (O), which I have written about this here, in late 1999 and early 2000, trying to sell this position as part of a portfolio in my role at Charles Schwab (SCHW) and Chicago Equity Analytics, yet very few investors would even consider it. This was the case, even though Realty Income shares had roughly a 10% dividend yield back then, and most investors have it as core holding today, with a dividend yield that is less than half what it was, and a narrowing growth runway after a twenty-year good run of strong performance.

I also witnessed the same thing when I was buying out-of-favor REITs, specifically General Growth Properties, and First Industrial Real Estate (FR) in late 2008 and early 2009, which I chronicled in this article that I published on February 27th, 2020.

Use Panic Selling To Your Advantage – Highlighting A 14% Yielding Model Portfolio – KCI Research Ltd.

The key to build real wealth, IMO, is to own concentrated positions, ideally buying into panic selling, in the best outperforming companies of the next 20 years, not the best performing positions of the past twenty years.

We have been able to do this real time at The Contrarian.

$50 Million Plus In Profits On One Stock – KCI Research Ltd. (Updated, This Is Over $80 Million Plus Now)

For help in that endeavor to outperform, consider a membership to one of my research services. On that note, I am continuing to offer a 20% discount to membership (I am extending this through March of 2021 due to popular demand and my desire to help the greatest number of investors and then pricing will return to the normal levels, and then we will raise prices at some point to maintain the level of dialogue we have now) to “The Contrarian” (past members can also direct message me for a special rate). Remember, this compliment when it comes to pricing.

Indeed, I subscribed to The Contrarian despite a high price compared to other Seeking Alpha subscriptions, because it is explicitly anti-herd or orthogonal to the herd. Indeed, the more I study it, the more I find The Contrarian subscription price to be a relative bargain.

And this one on pricing too.

Before 2020, I thought it would have been crazy to pay over $1,000 for a subscription. Yet after reading one of Travis’ articles and a 2-week trial, I realized that the value offered here, vs other services, is substantially greater.

Additionally, I am offering a limited time 20% discount for the first 10 new members (I expect these slots, some of which I view as a stepping stone to “The Contrarian”, to fill up fast as they have done previously) to a host of research options, including a lower price point. If you subscribe to a premium option, I will set-aside time for a personal phone call to get up to speed. To get these offers, go here, and enter coupon code “march” without the quotes.

Reach out with any questions via direct message.

Via my research services, or another avenue, please do your due diligence, and take advantage of what I believe is a historic inflection point, which I believe will supersede 2000-2002, and 2000-2007, in the growth-to-value rotation.

Best of luck to all,


P.S. Resilience is perhaps the most important ingredient to be successful in life, and in the markets. Keep that in mind right now.

Author’s Highlighted Posts – A Golden Age For Active Investors

  • Passive investing, and ETF investing, have dominated the last decade.
  • These unsustainable investing trends have created giant price distortions.
  • The next decade will be extremely lucrative for active investors and we are at an inflection point today.

(Travis’s Opening Note: This article was originally authored and published on September 21st, 2017, and it remains a “foundation article”, in my opinion, for my current investment stance, and it one of my favorite articles that I have authored.  It is being republished today, on 10/23/2018, to launch a new series category, which will be titled “Author’s Highlighted Posts”.)

“A 60:40 allocation to passive long-only equities and bonds has been a great proposition for the last 35 years,” …”We are profoundly worried that this could be a risky allocation over the next 10.”

Sanford C. Bernstein & Company Analysts (January 2017)

“Be stubborn on vision and flexible on journey”

Noramay Cadena

Life and investing are long ballgames.”

Julian Robertson

Opening Note From WTK

When I worked at Oxford Financial Group, Limited, which was, and remains one of the largest RIA’s in the United States, I was hired by the CIO, Howard Harpster, who was the former head of BP Amoco’s (BP) pension plan. Howard was an intelligent, calculated risk-taker who cultivated relationships in the then opaque, and relationship-based, private equity, private real estate, and hedge fund arenas.

Howard eventually returned to his native Texas, which is near and dear to my heart, as I have many close relatives and friends in Texas, to sort through a family estate, and then take the role of CIO at the Texas Children’s Hospital.

Oxford conducted an executive search, on which I served a role, and narrowed the candidates for CIO to two individuals, ultimately hiring their current CIO in roughly late 2006 or early 2007.

The new CIO, who came from a background at Okabena, which was the family office created by the founding family of Target (TGT), embraced passive investing.

This firmly contrasted with my belief that the markets were not efficient, and we had a rousing discussion and debate for several years, both between the CIO and our broader investment strategy group, which was composed of four key decision makers, including myself, before I ultimately resigned, with good relationships in-tact, to start my investment firm in February of 2009.

At the time, I was full of confidence, as I had made money in 2008, when most investors and speculators lost money, and then I procured a small fortune, at least for me, from timely investments made in 2008 & 2009.

In the middle of 2008 and 2009, I thought it was a dream environment for active investors, and I could not see how the passive investment craze, that characterized the market’s rise from 2003-2007 could continue.

I was spectacularly wrong with this prediction.

Passive investing has dominated the past decade, making the shift to passive investments from 2003-2007 look like a blip on a long-term chart.

This has driven many active managers out of the investment industry (Travis’s Updated Note 10/23/2018: This purge has continued into 2018), accelerating the dispersion between passive investors and value investors, which has resulted in hedge fund closures, the decline of once prominent mutual fund families, and the downgrade in reputation to value investing and value investors.

This seemingly never ending, self-reinforcing, investment cycle has resulted in a bi-furcated market, where the favored investments of passive indexes, dividend growth strategies, and popular ETF’s are traded at some of the highest valuations in history, while equities outside these favored strategies trade at some of the lowest valuations in history.

In summary, this has created another dream environment for active investors, which is even better than 2008-2009 time-frame, in my opinion, and a golden age of active investing is right in front of investors and speculators, in my opinion.

We got a taste of this opportunity in 2016, but the market has not made the pendulum shift from passive investing being in-favor to active value investing being in-favor easy.  In fact, 2017 has been one of the most difficult, if not the most difficult years, of my investment career, thus far, but that should not take away from the scope, or magnitude, of the opportunity that is at hand.

Someday in the near-future, it is my prediction that investors will rue the fact that their equities are part of the benchmark indexes, and popular ETF strategies.  Thus, we sit on the cusp of a historic inflection point.  On this note, I came across a past issue of Grant’s Interest Rate Observer, from last October, about a week ago, that reinforced this point, and I wanted to write something about it, so here is that observation as part of my Investment Philosophy series.

Selected Prior Member Articles Of Interest On Investment Philosophy & Related Topics

Selected prior articles of interest for members on investment philosophy, market history, and portfolio strategy include:

Investing Philosophy – Abandoning Ship & Capitulation – 8/3/2017

Investment Philosophy – Identifying A Good Opportunity Is Only Half The Battle – 7/16/2017

Investing Philosophy – Staying Focused Is Hard To Do – 5/27/2017

Market Historian – What Happens When The Fed Raises Rates – 3/16/2017

Investment Philosophy – The Fallacy That You Always Need To Be Fully Invested – 2/2/2017

A Matter Of Perspective – Commodities & Commodity Stocks – 1/6/2017

Interview Series – Part II Of WTK’s Take On Edward Chancellor’s View With A Focus On Precious Metal Equities – 12/15/2016

Interview Series – WTK’s Take On Edward Chancellor’s View On “Intelligent Contrarian Investing” – 11/21/2016

Investment Philosophy For The Contrarian Subscribers – A Take From John Hempton @ Bronte Capital – 10/20/2016

The Contrarian’s Top-Ten Lists & Thoughts On Portfolio Strategy – 9/29/2016

Reviewing Lucas White’s And Jeremey Grantham’s Research On Commodity Stocks & A Market Note From WTK – 9/9/2016

Working Investment Thesis

It is my belief that we are in the final innings of the bull market that began in March of 2009, with bonds topping now, then stocks, and then commodities.

The Inspiration

Last week, I was reading, and researching, and I came across an October 14th, 2016 issue of Grant’s Interest Rate Observer, which was a recap of a presentation that Steven Bregman gave at Grant’s October Investment Conference.

I have been a subscriber to Grant’s Interest Rate Observer, and I am a fan of James Grant, who was born in New York City, but attended undergraduate college at Indiana University.  Mr. Grant has maintained ties to Indiana, including speaking as a guest speaker at the CFA Society of Indianapolis functions, which I have been involved with as a current member and past board member (I have also been a member of the Chicago CFA Society where Grant’s work has been featured).

This particular issue caught my eye, because it delved into the index/ETF bubble, which has been a topic that I have been writing about, and which I have been thinking about a lot lately.

A Passive Investing ETF Bubble

The opening paragraph describes the topic up for discussion, and the second paragraph spells out the views of Steven Bregman, president and co-founder of Horizon Kinectics, who presented at Grant’s October 4 th, 2016 Investment Conference, and like the famous line from Jerry Maguire, the presentation had me at hello.

Specifically, here is the opening paragraph and then the second paragraph, and then a screen shot that captures the broader discussion.

“A golden age of active investment management awaits only one signal event, Steven Bregman, president and co-founder of Horizon Kinetics, told the Grant’s conference-comers on Oct. 4. A collapse of the index/ETF bubble is that intervening disaster. To hear Bregman tell it, no crash would be so well-deserved

He called the exchange-traded fund excrescence the world’s biggest bubble. “It has distorted clearing prices in every sort of financial asset in every corner of the globe…,” asserted Bregman. “[I]t has created a massive systemic risk to which everyone who believes they are well diversified in the conventional sense are now exposed.”

Re-reading this piece, the amazing thing to be is that the passive investing/ETF bubble appeared to peak in 2016, yet roughly a full year later, the excesses have only been amplified.

No Factor For Valuation = No Price Discovery

The crux of Bregman’s case, and my argument too, is illustrated on page 2 of the linked report.  In these paragraphs, he deconstructs the iShares Emerging Market Bonds High Yield ETF (EMHY), and in doing so, he exposed the flaws of indexing, particularly when accomplished through ETF investing.  Here is a highlighted portion that I think makes a convincing point.

“By operation of law,” Bregman went on, “new money in EMHY is allocated based on float. In other words, the more debt a nation issues, the greater the allocation to its bonds because it has a greater capitalization. Petrobras (PBR) issues more bonds: greater index weight. Yes. The allocations must be done promptly and according to their precise index weights.

There is no factor in the algorithm for valuation,” our speaker noted. “No analyst at the ETF organizer—or at the Pension Fund that might be investing—who is concerned about it; it’s not in the job description. There is, really, no price discovery. And if there’s no price discovery, is there really a market? In which case, what is EMHY really worth?

This is about artificial supply-and demand pressures. Now, take this exercise and apply it to the equity indexes. That’s what’s going on. It’s just tougher to debate.”

The emphasis added through formatting was mine, because that is what is going on in the investment management industry.  As the former second CIO I worked under at Oxford aptly discovered, probably from “career threatening” mistakes at his prior CIO position at Okabena, there is no reason to take “career risk” when everybody is embracing the same way of investing, namely passive investing, and investing through ETF’s.

Building on this narrative, active investors, particularly active value investors, who were steamrolled from their purchases of financials and real estate equities in 2008 and 2009, negating their typical out-performance in bear markets, have been unable to serve as a check-and-balance to the “blind” passive money, because they have rapidly gone extinct.

Ultimately, this has harmed price discovery and further distorted valuations.

The ETF Divide

During the conference, Bregman highlighted how ETF’s have influenced stock valuations.  One specific example that stands out, and was illustrated, was the impact of ETF’s on Exxon Mobil (XOM).  Here are the paragraphs discussing its valuation and price performance from 2013-2016.

“Bregman lingered for a while on Exxon, a kind of ETF Swiss Army knife: “Aside from being 25% of the iShares U.S. Energy ETF, 22% of the Vanguard Energy ETF, and so forth, Exxon is simultaneously a Dividend Growth stock and a Deep Value stock. It is in the USA Quality Factor ETF and in the Weak Dollar U.S. Equity ETF. Get this: It’s both a Momentum Tilt stock and a Low Volatility stock. It sounds like a vaudeville act.”

Bregman proposed a mind experiment: “Say in 2013, on a bench in a train station, you came upon a page torn from an ExxonMobil financial statement that a time traveler from 2016 had inadvertently left behind. There it is before you: detailed, factual knowledge of Exxon’s results three years into the future. You’d know everything except, like a morality fable, the stock price: oil prices down 50%, revenue down 46%, earnings down 75%, the dividend-payout ratio almost 3x earnings. If you shorted, you would have lost money”—because the financial statement didn’t mention the coming bifurcation of the stock market that Bregman called the “ETF divide.”

On one side of the line are the anointed ETF constituent securities; on the other side is everything else.”

Again, the emphasis added was mine, as the impact of ETF investing has been particularly pronounced in the commodities sector, and specifically the energy sector.

The larger market capitalization companies that have dominated the energy ETF’s, notably Exxon and Chevron (CVX), have relatively flourished while most of the mid-capitalization and smaller capitalization equities have been in one of the worst energy equity bear markets in modern market history.

Thus, even relatively large exploration and production companies, like Chesapeake Energy (CHK), and Southwestern Energy (SWN), which are the second and third-largest natural gas producers in the United States, have been cast aside due, in part, to their market capitalization’s, which shrink further as they are not included in the exalted passive indexes and chosen ETFs.

Risk Is Misinterpreted

From my writing, you can already probably tell how much I enjoyed this presentation, and the corresponding write-up.

Here is another nugget, via several paragraphs about risk, specifically related to the REIT sector, think the Vanguard REIT ETF (VNQ), or the iShares U.S. Real Estate ETF (IYR), that I think will hit home for many investors.

“Now came a question: “So how do they—the big ‘they’—address this risk?”

And an answer: “In the financial realm, risk has come to be measured by historical price volatility. Consequently, enormous effort is devoted to finding low-volatility sectors with sufficient liquidity. The most prominent statistic for volatility is beta. Go to Yahoo Finance, type in ‘IBM,’ (IBM) and there, front and center alongside price, market cap and dividend yield, is beta.

“Let’s examine this,” Bregman went on. “The iShares REIT ETF (IYR), with a 2.8% yield—which I personally see as 35x earnings—has a beta of 0.72. That is low-risk by definition. But which beta should be used for that definition? The beta for the three years through August 2016? Why not the beta for the three years to March 2007?

Because the beta at the end of March 2007 was even better—an incredibly low 0.3—only 30% of the volatility of the S&P 500. By February 2009, two years later, the ETF fell 90%, and even Simon Property Group (SPG) shares fell almost 70%, while the S&P (SPY) fell about 46%.”

The problems that we had evaluating risk in 2007 are even worse today, in my opinion, as correlations are higher, and the amount of listed equities in the United States has shrunk by roughly half.

In summary, the accelerated adoption of passive investing and ETF investing has heightened risks, but investors and speculators do not realize this, because volatility in the markets has been so low, and the lack of draw-downs has provided and eerie calm and complacency that supersedes the 2007 investing landscape, in my opinion.

The Opportunity

For someone who has spent the past 25 years actively investing and speculating, but who has gone through a very rough period of performance, I can empathize with the following quote from the write-up of the conference.

“So much for life on the sunlit side of the ETF divide. What about life in the darkness? “In the past two years,” said Bregman (Author’s  Note: Remember this presentation occurred in October of 2016, but the trends have continued through today, nearly a year later), “the most outstanding mutual fund and holding-company managers of the past couple of decades, each with different styles, with limited overlap in their portfolios, collectively and simultaneously under-performed the S&P 500. We’re talking 10 to 20 percentage points in a given year. There is no precedent for this. It’s never happened before.

“It is important to understand why,” he stated. “Is it really because they invested poorly? In other words, were they the anomaly for under-performing—and is it reasonable to believe that they all lost their touch at the same time, they all got stupid together? Or was it the S&P 500 that was the anomaly for outperforming?”

From my perspective, I agree with the bulk of this commentary, with the exception of the comment about the under-performance by the best money managers.  It has happened before, and it happened fairly recently, specifically in 2007 and 2008.

During this time-frame, active managers, particularly value managers, under-performed, as traditional bastions of value, notably financial stocks, suffered the worst declines.

I can remember than time-frame clearly, and what I remember is that very few analysts and investors could value anything, similar to today.  It was confusing, and confounding, but it offered substantial opportunity, as does the investing environment today.

When valuations have no anchor, prices can fluctuate wildly.  For us, as contrarian investors, that means some of our big losers on the year, or since inception, have the potential to rapidly reverse course, but it is hard for us to realize that right now, as we have been battered by the non-stop declines, constant negative news headlines, and price action that is seemingly negative every day and every week.

Conclusion – Embrace Active Investing & Being Different Than The Indexes

Here are some quotes I highlighted in the article, directly from the presentation, which again occurred in October of 2016, but is even more relevant today, in my opinion, and I wanted to list them again, because they provide a conclusion that practically writes itself.

“He called the exchange-traded fund excrescence the world’s biggest bubble. “It has distorted clearing prices in every sort of financial asset in every corner of the globe…,” asserted Bregman. “[I]t has created a massive systemic risk to which everyone who believes they are well diversified in the conventional sense are now exposed.”

“There is no factor in the algorithm for valuation,” our speaker noted. “No analyst at the ETF organizer—or at the Pension Fund that might be investing—who is concerned about it; it’s not in the job description. There is, really, no price discovery. And if there’s no price discovery, is there really a market? In which case, what is EMHY really worth?”

This is about artificial supply-and demand pressures. Now, take this exercise and apply it to the equity indexes. That’s what’s going on. It’s just tougher to debate.”

“On one side of the line are the anointed ETF constituent securities; on the other side is everything else.”

Because the beta at the end of March 2007 was even better—an incredibly low 0.3—only 30% of the volatility of the S&P 500. By February 2009, two years later, the ETF fell 90%, and even Simon Property Group (SPG) shares fell almost 70%, while the S&P (SPY) fell about 46%.”

“It is important to understand why,” he stated. “Is it really because they invested poorly? In other words, were they the anomaly for underperforming—and is it reasonable to believe that they all lost their touch at the same time, they all got stupid together? Or was it the S&P 500 that was the anomaly for outperforming?”

From the presentation, its documentation, and my chronicling, and commentary, it should be clear that the markets have reached extremes (they had already reached these extremes in 2016 but have extended these extremes further in 2017), perhaps beyond any prior valuation extremes in modern market history.  Absolute valuations certainly rival 1999, but relative valuations between the “have’s” and the “have not’s” is even more pronounced.

The lack of price discovery, and valuation analysis, which is accelerated in a self-reinforcing cycle by the massive fund flows into passive and ETF investing, has created a market that is ripe for price discovery, which should be a dream environment for active investors.

In summary, simply surviving to get to the price discovery phase has been difficult, however the rewards should be similar in magnitude, and perhaps even greater than the 2008/2009 opportunity, which rivals any period of potential returns in modern market history.

To close, the market has a dividing line today, which is even more pronounced than 2016, and the stock market remains extremely bi-furcated.  The opportunity lies on the other side of this dividing line, in sectors, like commodity equities, which have very little weight in indexes.  Drilling down further, commodity stocks that reside outside the “halo” of wide-scale ETF ownership, offer return potential that is every bit as good as the depressed financial and real estate shares in the Spring of 2009.

Two Research Services

To get in on the ground floor of this opportunity (yes it is still a ground floor, maybe even lower after energy prices bottomed nearly three years ago in 2016), please consider one of the two following research services.

First, is The Contrarian, where we have a live history that actually captured the past significant inflection point in 2015 & 2016. Members can read through posts from that time, see how out-sized returns were achieved, look at what is similar today, and try to apply those past learning lessons to today’s market environment.

Put simply, I really appreciate our group at The Contrarian, many members who I have come to respect, and I am optimistic that we are all going to do very well together in the year ahead, similar to 2016.

We are always looking for new members that can add profitable ideas, or challenge existing ones, so if you fit this criteria, consider signing up.  A fair warning, though, our group is like the Marines, only a few, only the strong, can survive.

Second, I have had quite a few requests for a lower-priced, curated research product, a stepping stone to The Contrarian (our goal is that you try our research at a lower price, make money, and then later upgrade to The Contrarian for the more in-depth, interactive experience), and over the last several months, I have slowly put together a more traditional research newsletter.

To celebrate the second official month of this research product, where the goal is deliver one deep-dive article a month via a PDF emailed report (and I believe there are a lot of once in a generation opportunities today), I am offering a 21% discount off of a much lower annual price point. To get this limited-time discounted price, simply use the coupon code “december”.

Ultimately, I think we are now at a major inflection point in the financial markets, highlighted by the price action in October of 2018, and November of 2018, which has been ongoing in slow motion for three years, but which could suddenly accelerate. Being different, being contrarian, has been extremely painful for over two years now, however, resilience and persistence, two necessary qualities for success in contrarian investing and in life in general, in my opinion, are leading to what I believe is an upcoming golden age for active investors.

If you have any questions, send me a direct message at any time,


P.S. I have learned over my career that handling disappointment, and taking advantage of the resulting opportunity is a crucial skill for investors and speculators.  I cannot tell you how often I am disappointed in the investment markets with price action, yet stubbornness, persistence, and hard work often, but not always, result in a favorable situation, like most things in life.

P.S. II With everyone looking for a price dislocation similar to 2007-2009, look for something different to happen, including a potential pick up in inflation and interest rates, which very few are even considering.