for what it's worth ... from investment advisor James Gruber at
(snip)"There’s a traders saying that warns against trying to “catch a falling knife”. That is, you shouldn’t buy assets which have sharply declined as they’re likely to go down further before there’s any recovery. I’m not sure when this saying gained popularity but I suspect it speaks a lot to the short-term mentality of most investors today. Because history suggests that you should do the opposite – buying assets down 60% or more has delivered fantastic results on 1, 3 and 5 year timeframes. And intuitively this makes sense. If almost everyone has sold out of an asset and there are only buyers left, there’s usually only one way for prices to go.
Given this, I thought it’d be worth taking a look at the assets which have been pummelled and may be due for a comeback. Globally, the most obvious standouts are Greece and junior gold miners. There are others though, particularly in agriculture, where sugar and coffee are still down 75% and 65% respectively from their all-time highs in the 1970s. In my backyard of Asia, stocks in China and Japan qualify, down two-thirds from their all-time highs. Vietnam is also a contender, having fallen 60% from its 2007 high. And among currencies, the Indian rupee is worth considering, given that it hit all-time lows versus the U.S. dollar in recent weeks. Of the above, gold miners, coffee, Vietnam and the rupee look the most interesting. ***
Over the past week, global fund manager Mebane Faber wrote a brief article with the aforementioned title. Specifically, he looked at the performance of sectors, industries and the total stock market in the U.S. after they’ve been hammered. And here’s what he found:
Average 3 year nominal returns when buying a sector down since the 1920s:
down 60% = up 57% - down 70% = up 87% - down 80% = up 172% - down 90% = up 240% ***
Faber went on to conclude:
“It’s hard to buy something down 80%, especially when you owned it when it was down 30%, 50%, then 80%. But usually that is a great time to be wading in … Some recent examples of assets that have got clobbered include tech in 2002, homebuilders in 2009, and Greece and (Junior) Gold Miners now.”
Other supportive evidence
Faber isn’t the first to notice this phenomenon. Some years ago, two U.S. professors, Werner DeBondt and Richard Thaler examined the investment performance of U.S. stocks with the worst and best prior investment results. In each year from 1932-1977, the professors selected the 35 best and worst performing stocks over the preceding five year period. And the results were compared to a market index, namely all of the stocks on the New York Stock Exchange.
They found that the worst performing stocks over the preceding five-year period produced cumulative returns 18% better than the market index some 17 months after formation. Meanwhile, the best performing stocks in the five years prior produced returns 6% below the market index over the subsequent 17 month period. ***
That said, buying unloved assets does have merit. In my view, there are four such assets which provide potential opportunities today:
1) Junior gold miners. Smaller gold companies have been annihilated after the gold price peaked in September 2011. The GDXJ junior gold miners ETF in the U.S. is down around 80% since that time. I am long-term bullish on gold (though did foresee the latest correction, which probably has a little more to go) as few of the fundamental reasons for owning the metal have changed. Principally, that it acts as a hedge against central bank profligacy and currency debasement. But you don’t have to be bullish on gold to see upside for the junior gold miners, many of whom are now priced for oblivion.
2) Coffee. I must admit being a sucker for almost any asset that’s down 65% from all-time highs reached 36 years ago. And the good part is that supply/demand fundamentals for coffee look reasonable. Inventories remain relatively low, while demand growth looks very solid given the increasing attraction of coffee to the developing world, particularly in Asia ***
3) Vietnam. The Vietnamese stock market is down 60% from 2007 highs, though it’s recovered somewhat this year, up 17% in local currency terms. Think of China today as where Vietnam was in 2008-2009: a massive credit bubble that unwound in a messy way. But that is now largely behind Vietnam and some reforms are starting to bear fruit (though there’s not enough of them). Meantime, the stock market is cheap, especially given the depressed earnings base and potential growth going forward.
4) The Indian rupee. The rupee reached all-time lows versus the U.S. dollar in recent weeks due to broader concerns over emerging market currencies as well as India’s large current account deficit. The latter issue seems overblown, particularly after India recorded a large reduction in the deficit in the first quarter of this year. This news, released during the past week, has helped the currency recover somewhat but there should be more to come.
Yes, India has problems but they’re well known. There are a number fundamental positives which are being currently ignored, such as extensive reform in the previously dysfunctional power sector, the emergence of pro-business leaders in several key states and caps on subsidies such as fertiliser (subsidies have been a key reason for inflationary pressures). This suggests that India is in a bit better shape than the currency markets given it credit for. ***
You’ll have noticed that this list of potential buying opportunities has some notable exclusions, particularly Chinese and Japanese stocks. No doubt, both are unloved by investors but I’m not sure that we’ve seen a bottom in either stock market."(snip)
... as always, please perform your own due diligence.
I would also point out that there are Exchange Traded Funds available on US and other major stock markets which cover all of the above sectors ... with those ETF's allowing any would-be 'amateur' investors to participate without the necessity of having commodity / currency brokerage accounts.



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