4 Compelling Contrarian Choices

11/30/2011 7:30 am EST

Focus: ETFs

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

If you’re like most people, you may find it tough to buck market consensus—to go against what you hear and see in the media everyday—but sometimes it makes very good sense, says Nichols Vardy of The Alpha Investor Letter.

On one level, contrarianism is just about going against the grain. “Be fearful when others are greedy and be greedy when others are fearful,” opines Warren Buffett.

But you’ve heard that so often, it’s become its own form of conventional wisdom. Everyone knows that the key to losing weight is “eat less and exercise.” But “knowing it” and “doing it” are two different things.

More than that, you also have to be right. You can be contrarian and decide that the law of gravity “just isn’t for you.” But step out of a ten-story window, and you’ll suffer the consequences.

This is how I like to use contrarian thinking: every once in a while, I like to take all mainstream investment opinions and turn them on their head, just to rattle my brain.

You should try it, too. You may not necessarily be right. But it’ll force you out of your intellectual comfort zone. And I’m actually convinced that if you stick with it, you’ll become a better investor—and make more money—in the long run.

With that, here are four contrarian investment plays that you should mull for your own portfolio…

1. Buy the US Dollar
Living in Europe, I am painfully aware of the weak US dollar. Visit London, and you’ll pay $35 for a simple lunch. And as expensive as London is, other parts of Europe are worse. This past summer, I paid $22 for a McDonald’s Happy Meal in Switzerland.

Now, part of the reason that Europe is so expensive is that taxes are high. Almost everything you buy has a 15% to 25% Value Added Tax (VAT) on it. Think of it as a national sales tax. The United Kingdom raised its VAT to 20% and Hungary is raising its to 27% next year.

The other reason is that the euro—its recent pullback notwithstanding—is so darn overvalued. Other European currencies—the Swiss franc and the Swedish krona—are even more so.

The US dollar has long been the whipping boy of global currencies. A third consecutive year of trillion-dollar deficits and repeated rounds of quantitative easing by the Fed have kept the US dollar in the penalty box among global investors. No wonder the US dollar index reached a record low against a basket of currencies on August 29.

But currency investing is a relative game. And as prices in Europe confirm, the euro (and the Swiss franc) is overvalued and the US dollar is undervalued, on a purchasing power parity basis. And any time there are extremes in the market, there is money to be made.

The surprising news is that since the beginning of September, the US dollar has embarked upon an upward trend, breaking out of a long-term trading range.

If you really want to ramp up your bet on the greenback, you can buy the Direxion Mthly Dollar Bull 2X Inv (DXDBX).

2. Buy US Real Estate
All it takes is a quick trip abroad—whether to Europe, Asia, or Latin America—to convince you that US real estate is remarkably inexpensive.

On a square-foot basis, Florida real estate is selling at one-third the value of property in Budapest or Prague—and one-tenth of valuations in London. Certain parts of London are even more expensive. Indeed, $1 million only gets you 300 square feet in London’s exclusive Kensington neighborhood.

I don’t need to repeat all of the negative news surrounding US housing. But here’s what’s interesting: A lot of foreign investors now are parking their money in US real estate. A big chunk of the condos sold on Miami’s glitzy South Beach are being purchased by Brazilians. It turns out that Miami condos are selling at a fraction of the cost of those in Rio de Janeiro.

Truth be told, foreign investors have an edge that most US buyers don’t. As they are cash buyers, they don’t have to go the rigmarole of securing financing for their properties through the locked-up US banking system.

You can play the US real estate game through an exchange traded fund (ETF) like Vanguard REIT Index ETF (VNQ). But your best bet would be to start buying income properties in markets that are supported by major demographic trends.

But like politics, all real estate is local. So make sure that you educate yourself about the particulars of each market before you do so.

NEXT: 2 More Compelling Choices

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3. Buy European Banks
The European banking system has been teetering on the brink for a seeming eternity. With the Greek bailout back in the headlines, you never know what news the latest Sunday night meeting of Eurocrats in Brussels will bring on Monday.

But the situation may be better than the headlines suggest. Both the Irish and Greek banking sectors recently have attracted private equity investment from the likes of billionaire contrarian investors Wilbur Ross in the case of Bank of Ireland (IRE) and the Qatar Investment Authority in the Greek banking sector. And smart money always swoops in where others fear to tread.

I have two positions in European banks in my Bull Market Alert portfolio: Bank of Ireland and National Bank of Greece (NBG).

As I have told my subscribers, you always should view these positions as highly volatile options—with the benefit of them not “expiring” quickly the way that options do. These are genuine “lottery tickets”—either you’ll lose it all, or you will make three to ten times your money. I personally have positions in both of these stocks.

4. Sell Gold
The bull market for gold has come under terrific pressure. Now, I doubt I can tell you anything new about gold. Your inbox is already full of long e-mails about why gold will go up forever.

So, let me give my purely anecdotal take. When I travel, I always pick magazines in several different languages—just about the only time I get to use the German, Hungarian, French, and Italian that I spent years cramming into my head. It’s a great way to take the pulse of another country—and get a different perspective from the usual US-centered investment crowd.

Well, a few weeks ago, I saw the leading Hungarian business weekly had a cover story extolling the virtues of investing in gold. And as everyone knows, if Hungarians are piling into gold…look out below.

There were plenty of other anecdotal signs of a top. You now can buy gold in vending machines in Dubai. One in three Americans view gold as the single-best investment opportunity over the coming decade, according to a recent Gallup poll. That’s after gold is up five-fold.

To do as well as it has performed in the past decade, gold would have to hit around $9,000 an ounce.

If you want to go against the crowd and bet against gold, you can do it through the PowerShares DB Gold Short ETN (DGZ).

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