Where to Be Contrarian Now

I love Barron's "Big Money" poll...

Most people read Barron's looking for investment ideas. So twice a year, Barron's gives readers what they think they want... The magazine conducts a poll of money managers, asking them about their favorite investments. I look forward to the Big Money poll... but for different reasons than you might think...

You see, most investors gobble the answers up, thinking, "If the Big Money is doing it, maybe I should, too."

But I read the Big Money poll in exactly the opposite way... I know when the Big Money guys all believe the same thing, chances are great the trade is "full" already.

So if you read the Big Money poll right, it can actually be quite profitable. Let me explain...

In mid-March, Barron's e-mailed the poll to money managers. About 120 replied, and the results came out over the weekend.

The most hated asset class (not surprisingly) was real estate investments. Only 8.1% of money managers considered themselves bullish on real estate. And the most loved class was Latin American stocks... Only 13.8% of money managers were bearish on Latin American stocks.

The "untrained" reader might take this to mean the right trade is to buy Latin stocks and sell real estate stocks.

Funny, then, that real estate stocks are now the best-performing sector this year... Simon Property Group – the benchmark real estate stock – is up more than 20% year-to-date.

Meanwhile, the Latin American Discovery Fund, a collection of South American blue chips, is down for the year.

How can this be? The answer is simple...

When all the money managers are bearish, there's no one left to sell that stock... With only 8.1% of money managers bullish on real estate stocks when the poll was taken in mid-March, there was nobody left to sell real estate stocks. With no one left to sell, they couldn't go down any farther.

So here's what happened: On March 14, Simon Property Group traded for around $86. Now – just six weeks later – it's at $105.

On the other hand, the Latin American Discovery Fund peaked two days before March started, and it hasn't done much since. It was everyone's favorite in March... Why hasn't it gone up? In short, there's nobody left to buy – only 13.8% of money managers were bearish on Latin stocks when the Big Money poll was taken. Everyone who wanted to buy was already in.

Here's the key: You have to wait for the extremes in sentiment. The old saying is, "The crowd is wrong at the extremes, and right in between."

So let's look at another example from the Big Money poll... One result was as lopsided as I've ever seen: Only 3.6% of investors are bullish on 10-year Treasury bonds. That means nearly all money managers believe long-term interest rates are headed higher.

With long-term interest rates currently below 4%, investors think rates can't go any lower. After all, they haven't seen them lower than that in their lifetimes.

But they're ignoring history... Japan's property bust started in 1990. Interest rates were "normal" then – around 6% to 7%. But as the property bust went on and on, long-term interest rates fell to 3% by 1995... and actually fell below 1% in 2003. Even today, they're around 1.5%. Incredible!

All the talk is of inflation... and everyone expects interest rates to head higher. But don't go betting the farm just yet. This trade is already full, and long-term interest rates could surprise you and head much lower. Already, interest rates on 10-year Treasuries have fallen from more than 5% in the summer of 2006 to below 4% now.

If you want to follow the crowd and do the "ordinary" thing, bet against real estate stocks and bet that interest rates will head higher. But by doing the ordinary thing, you're destined for ordinary returns. If you want "extraordinary" returns, you must be willing to do something extraordinary.

One of my favorite hunting grounds for doing something extraordinary is Barron's Big Money poll...

Good investing,

Steve