Kass: Look for a Rally

This blog post originally appeared on RealMoney Silver on July 2 at 7:37 a.m. EDT.

I now expect a rally in equities. Indeed, it is not inconceivable that the market has hit a yearly low.

Unconventional thinking is more likely to be found on a lonely path than on a crowded committee.

"Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom."

-- David Swensen, Yale University

Non-consensus views are unpopular and uncomfortable, especially at extremes. They can also be quite profitable. Witness the big winners that once looked like kooky investments (e.g., fertilizer, steel and energy stocks five years ago), shorting the stocks of world-altering tech companies in the late 1990s, buying a startup named Google (GOOG) a few years ago and/or shorting the market (in general) and financial stocks (in particular), as I did during the summer of 2007.

Of course, in order to succeed, it is important that one's unconventional strategy is grounded in solid logic and analysis. Otherwise, the investments will not work out over time, and one might find it difficult to stick with the positions when they are out of favor. Again, Yale's Swensen writes in Pioneering Portfolio Management:

"Contrarian, long-term investing poses extraordinary challenges under the best of circumstances.... Unfortunately, overcoming the tendency to follow the crowd, while necessary, proves insufficient to guarantee investment success.... While courage to take a different path enhances the chances for success, investors face likely failure unless a thoughtful set of investment principles undergirds the courage."

Change, of course, is rare by definition. The self-proclaimed contrarian who escapes from the crowd is often wrong in his farsightedness and, as well, in his shortsightedness. The word unconventional does not go along with the words institutional, committees, unanimity, collective actions or groupthink.

Nevertheless, over time, unconventional thinking that is backed by logic of argument is synonymous with profits -- if one can identify, or come close to identifying, extreme (and wrong) behavior.

I have often observed that the crowd, during most timeframes, outsmarts the remnants. Stated simply, the variant call is always the hardest call; it is also synonymous with the word lonely. But that doesn't mean that, when the stars (fundamental, technical and sentimental) appear to be aligned, the variant call should not be made.