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[Note from Laurel Kenner and Victor Niederhoffer: Our weekly column, "The Speculator," appeared on the CNBC/MSN Money site from April 2000 to  September 2003, during one of the wildest rides in stock market history. We tested investment theories of every conceivable provenance, both in and out of the test tube. We both regard these columns as the best work of our lives. Our editor, Jon Markman -- writing coach, critic and friend -- memorializes our run.] 


MSN Money

12 contrarian picks, and 8 ways to catch more

By Jon D. Markman

Posted 9/10/2003

Most of us never got to see Ted Williams swing the bat, Ty Cobb run the bases or Walter Johnson throw a pitch. But for the past three years, we have had a front-row seat for the performance of one of the greatest traders of our era and grown immeasurably richer for it. Not just financially, though that may be true. But intellectually and spiritually, and even emotionally.

Our mutual exposure to Vic Niederhoffer, who concluded three years of columns at MSN Money last week, began and ended with seafood, appropriately enough for someone who taught readers how to fish, rather than handing them five flounder to eat right now.

I interviewed Vic for the job on April 15, 2000, at The Manhattan Ocean Club a couple of days after the Nasdaq had just plunged 286 points during a single session to sink 25% in a month. Expecting to meet a dour, tight-fisted, master of the universe with a shark’s swagger and a cigar, instead I met a trim, professorial, master of disaster with a lobster’s shamble and a cane. He started the evening by grilling the maitre d’ with questions on whether the market’s recent collapse had hurt business, and then without really waiting for an answer, launched into a prolonged oration on fin de siecle optimism and its propensity to paradoxically induce panic. The last time it had occurred was December 1899, he said, and history was now repeating itself.

One might have expected the cerebral speculator to be indifferent to the public suffering, if not actually an agent for the decline as a short-seller. But I was soon to learn, as readers did later, that Vic is an unflagging optimist who has proven that panics must be bought, not sold.

Vic was wrong on that score for the next two years as he and collaborator Laurel Kenner persistently encouraged readers to purchase growth stocks into the decline, but his lessons were valuable nonetheless. And last year, the pair hit their stride, offering some of the most original, contrarian and useful investment analysis ever committed to pixel or paper. It all came to an end on July 1, when, in a final meeting over smoked salmon at the Petrossian Café in midtown Manhattan, they said the research effort had grown too expensive to continue and resigned.

8 big thoughts -- and how to apply them
The Spec Duo enumerated their best ideas in their final three columns (here, here and here), but their education boiled down, for me, to eight big thoughts:

Given these gifts of insight, the difficulty is to use them appropriately. One of my successful applications has been the practice of buying stocks that Standard & Poor’s has booted from its benchmark big-cap index. The tested idea embraces a risky stock at the moment of potential reversal and takes a contrary position to one of the market’s leading professionals. The only two non-bankruptcy S&P 500 kick-out opportunities this year, AMR Corp. and McDermott International, are up 760% and 26%, respectively. Three to consider that were kicked from the S&P Midcap 400 last week are integrated steelmaker AK Steel Holding, projector maker InFocus and beverage distributor Coca-Cola Bottling.

Another application: Screen for the worst-performing industrial sector over the prior two years and buy its exchange-traded fund for a one- to two-year hold. A year ago, you would have bought the Merrill Lynch Semiconductor Holders after a hellacious 75% decline or the Merrill Lynch Internet Infrastructure Holders after an even worse 97% decline. Those two are up 66% and 150%, respectively, in the past 12 months. Three desperadoes to consider now are iShares Dow Jones U.S. Utilities (IDU), down 27% in the past two years; Merrill Lynch Pharmaceuticals Holders (PPH), down 26%; and SPDR Consumer Staples, down 17%. None of these is up more than 10% in the past year.

Ideas for patient contrarians
Vic hated to see financial journalists call up and quote what he called “tired old fund managers with stock to move” -- and he particularly hated to see us pick stocks. But he reveled in learning from fellow professionals with strong track records who retreat from the public eye.

So at the risk of being bonked in the head by one of the famous canes he sent to readers who sent him good ideas, let us turn now to another of my favorite pros -- someone who rarely offers his views to any but his own clients. Enter the reclusive and largely uncelebrated Bruce Sherman, head of Private Capital Management in Naples, Fla., for a few contrarian stock ideas.

When I first wrote about Sherman last November (“Lessons from the man who sells to Buffett”), I noted that he was the top institutional shareholder of several dozen small- to medium-sized companies, many of them much-hated. The one he felt most strongly about at the time, and which the market most detested, was software maker Computer Associates. It’s up 81% since the column ran on Nov. 27. Another was Apple Computer, which is up 45% since. A third was Scientific Atlanta, which is up 160% since.

In the spirit of a paean to reversal, I called Sherman last week to see if he would identify his latest jihads. His answer was predictably unpredictable: Newspapers. He says they’re trading at the same valuations as six years ago, are prodigious cash cows, and will be tremendous beneficiaries if an economic upturn generates an upturn in advertising since all new revenues will fall directly to the bottom line. He particularly likes newspaper companies that also own local broadcasting affiliates. Favorites are Belo, of which he owns 9%; Dow Jones, of which he owns 5%; and The New York Times, of which he owns 4.4%. He dramatically raised his stake in each of them this year, according to SEC records. “I love these businesses,” he says. “The market thinks that there is no top-line growth, and newspapers are pretty boring, and we read them but our kids don’t. But it’s just like unfounded fears of the death of the movie business when cable came out. These are tremendous gatherers of content and world-class franchises. If you can buy them at low multiples, why not do it?” He believes that Dow Jones, whose earnings are in the tank and fetches about the same price as 10 years ago, will likely ultimately be sold at a premium by its controlling family. He doesn’t care if it takes a while; he’s patient.

Three other ideas for contrarians who aren’t in a hurry:

Not for the faint-hearted
Reading Vic’s ideas on investing over the past three years was like taking voice lessons from Placido Domingo. Sounds good, but he’s got something you probably don’t: A doctorate in statistics; access to a vast database of prices and proprietary software to manipulate it; a staff of math geniuses to brainstorm with; nerves of steel; and 40 years of intuition. Exploiting Sherman’s ideas is more feasible. But success from both approaches requires discipline, self-knowledge and the mental flexibility to expect and acknowledge change.

I’ll follow up in the next six months to see if any of these investment suggestions had merit.


 S&P 400 Kick-outs


9/4/03 Price

AK Steel Holding (AKS, news, msgs)


InFocus (INFS, news, msgs)


Coca-Cola Bottling (COKE, news, msgs)




 2-year Outcasts


9/4/03 price

iShares Dow Jones US Utilities (IDU, news, msgs)


ML Pharmaceuticals Holders (PPH, news, msgs)


SPDR Consumer Staples Sector (XLP, news, msgs)




 Sherman's Army


9/4/03 price

Belo (BLC, news, msgs)


The New York Times (NYT, news, msgs)


Dow Jones (DJ, news, msgs)


Topps (TOPP, news, msgs)


Oppenheimer Holdings (OPY, news, msgs)


Marcus (MCS, news, msgs)



Fine Print
The Manhattan Ocean Club was filled the evening that Vic, Laurel and I met. A year later, it instituted a special dinner for the price of the Nasdaq; in December 2001, you could eat for $25.00. They had to stop the practice in 2002, Vic says, as dinner at $12.00 led them to lose too much money and few brokers could afford to eat in New York at any price, anyway. … Here’s a link to the past six months of Vic and Laurel’s work. … The best screening tool for exchange-traded funds is at the Nasdaq Web site. Click the name of any fund to see the names of the companies that comprise it. Here’s the Pharmaceutical Holders. ... To discover the top institutional owners of a stock at MSN Money, visit the stock’s Ownership page. Here are ownership pages for Belo; New York Times; Computer Associates; and Topps. … My own list of beaten-down S&P stocks with turnaround potential has done pretty well in the last two weeks (“Ride out a reversal with down-and-out stocks,”). Grocery chain Winn-Dixie Stores (WIN, news, msgs), the sorriest looking of the lot, is up the most with a 10% gain.

Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jdm@oddpost.com. At the time of publication, he had no positions in stocks mentioned in this column.

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