The Ultimate Contrarians
By Tom Dyson
January 6, 2006
What you are about to read will surprise you.
You have never seen an investment strategy modeled like this. It’s absurd. It’s weird. It’s reviled. And it demands the suspension of standard American preconceptions to understand it.
Such is the life of a contrarian investor. Have you got what it takes?
Digging in other people’s garbage.
There… I said it. Take a good look at these words and think about your gut reaction. Does this make you laugh? Does it make you cringe? Are you surprised to be reading about dumpsters in an investment letter?
Dumpster diving does not mean scavenging through somebody’s kitchen scraps and consuming half-eaten, half rotten chicken legs from a Hefty Bag. Yes, some people do this. They need a hot shower and rehabilitation.
But done correctly, dumpster diving is not messy, dangerous or time consuming. It does, however, require some willingness to go against the norm.
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“The other day I found a bag with over 100 coins in it,” writes John Hoffman, author of The Art and Science of Dumpster Diving. “Most of the coins were relatively unimportant pieces from European countries. However, there were two Kennedy halves and a silver ‘liberty head’ half dollar, very good condition, date mark 1914, mint mark ‘S’.”
It’s amazing what dumpster divers find: Lots and lots of good, useable food. Clothing. Tools. Every kind of household furnishing. Toys. Books and magazines. Stuff suitable to feed livestock. Composting material and things suitable for fertilizer by the ton, neatly bagged for transport.
And much, much more… scary stuff. Firearms. Human bodies. Drugs. Identification, credit cards. Uncashed checks, blank checks. Letters suitable for blackmail. Pornography...
As an investor, the concept of dumpster diving fascinates me. It is the perfect model for a contrarian investment strategy. All the hallmarks are here:
On one side of the ledger, you find the most wasteful society ever witnessed. On the other side of the ledger, you find a citizenry obsessed with germs, cleanliness and fear of looking poor.
That’s precisely why opportunities are so great for a daring few. No competition, and plenty of supply. The catch is, the opportunity is only open to those prepared to run against the crowd.
Compare this dynamic to a commodity price cycle. Take lead for instance. On one side of the ledger, no one wants it. It’s poisonous, so they don’t add it to paint or gasoline anymore.
So it falls in price.
On the other side of the ledger, inventories of lead are high. Many entrepreneurs had entered the business of supplying lead when the prices were high.
With the large inventory overhang, the price falls further.
Meanwhile, the entrepreneurs have all gone out of business. No one has bothered to dig a new lead mine or open a new smelter in years. Lead mining has become one of the most politically incorrect and least fashionable businesses in the world.
Here’s where the dumpster divers come in. They buy into what’s left of the lead industry. It’s a great investment because they know the price can’t fall much further if no one has any lead to sell. At the same time, if a new use for lead is discovered – and demand rises – the lead price will be squeezed higher.
I think of it as a two-pronged attack on price… supplies are falling while demand is rising.
This is not about scavenging. Nor is it about investing in trashy stocks with low prices. And it certainly does not mean digging through other people’s garbage.
This idea is about picking up cheap goodies out of the dumpster… and taking a position that other investors hate.
It’s hard to lose when you buy something that’s cheap and scarce. In Tuesday’s column, I will present a textbook contrarian maneuver - or as I prefer - a perfect dumpster diving opportunity…
Good Investing,
Tom Dyson
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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