The television ads promoting investment products for registered retirement savings plan season have already appeared, while the ads for crooners singing Christmas carols are still noticeably absent. Don't these two species have a symbiotic relationship? In all likelihood, many of these ads will stress the importance of diversification -- maybe even the one for The Andy Williams Christmas Album, which might have Hanukkah and Kwanzaa tunes thrown in.
We see diversification as important -- to a degree. The third rule in The Contrarian Investor's Thirteen: How to Earn Superior Returns in the Stock Market is: "Diversify, but beware the devil of overdiversification." Managing an overextended portfolio becomes a time and expense burden, and returns normally suffer. In addition, investments can contradict each other, as people who are investing simultaneously in oil companies and U.S. car manufacturers might be realizing.
Of course, covering all the bases isn't something specific to a contrarian strategy but is the basis of a sound investing plan. It's critical to lowering the risk of, say, a portfolio heavily invested in Toronto Stock Exchange-listed income trust units. Expect the unexpected.
At Contra the Heard, we invest in publicly traded stocks and seek above-average returns by employing a contrarian strategy that includes diversity in sectors and geography. We recognize, though, that the path to diversification doesn't end at the oak-panelled walls of Bay Street and Wall Street. Other investments may not appear to be as sophisticated, but can still preserve one's assets, and even offer the possibility of above-average returns. Some categories include artwork, antiques, coins and stamps, jewellery, memorabilia, and scripophily (the collecting of old stock and bond certificates) to name a few. The markets for each of these areas are vast and complex, so analysis and experience play just as important a role as with financial instruments.
Contrarian strategy in these areas still involves going against popular opinion and seeking out investments that are overlooked, undervalued or beaten down. At different points in time, each of these investment possibilities is either hot, or not. Quite simply, in that regard, they are not so different from stocks.
In addition to the diversification and possible wealth-creation of owning some of the above, owners can receive tangible pleasures. Scripophily enthusiasts might admire their Bre-X share certificates, while others gaze at the artwork on a wall, some head to a party in that chic necklace, or trade their Eric Lindros hockey card for a Denis Dupere and a Larry Jeffrey. In a best-case scenario, these areas can evoke passion, something that tingles on the quality-of-life scale. That is much more exciting than buying a few shares of Air Canada.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter. This column first appeared on GlobeinvestorGOLD.com.