Contrarian Finance

Before I dive into my more detailed analysis and recommendation of Citigroup (C), I need to explain a few things about my overall investment philosophy. I'll give a lot more detail on this in a later post, but you'll need the framework to understand where I think Citigroup fits in my portfolio, and to make an intelligent judgment about whether or not it might work for you. And let me be frank, this pick won't make sense for everyone.

Investing, especially contrarian investing, is a highly personal affair. Your own beliefs and convictions about a given investment, about the market in general, and about investing in general will all color your judgment. As you will learn if you stick with me, I am really big on risk analysis and risk mitigation. In that spirit, I think the number one risk a contrarian must mitigate is himself or herself. After all, what if I'm not smarter than the average person, and as a result, my investment choices will underperform the market.

To mitigate the risk of myself, I follow what I call a multi-tiered investment strategy. The tiers are basically groupings of risk/reward scenarios, and an unique investment growth trajectory, because the savings rate plus the investment rate implies a timeline for reaching financial independence. So, more specifically, Tier 1, for me, is the "market return" tier. This strategy assumes that I am, in fact, not more clever than the average person, or more accurately, the average fund manager, I suppose. Tier 1 then, is an annual savings rate, that when compounded by a reasonable (which is to say, conservative) market return, will allow me to retire comfortably at about 60 years of age (not coincidentally when I can start withdrawals from an IRA/Roth IRA without penalty). I know I'm speaking in sweeping generalities here, but I promise I'll give details and examples later. Target return here feels like 10% or so.

Tier 2, for me, is then a "market outperform" strategy, that ideally should beat the market return, but with greater risk. Since this strategy hopefully offers a higher return, it should act as a "bonus" return to the return of Tier 1, thus shortening the timeline to financial independence. I only "fund" this strategy in a given year when I know that Tier 1 is or will be fully funded. But note that this is still a somewhat conservative strategy, in that it seeks to better the market return only by a few points, but to do so consistently and with low fees. Generally I follow a "buy and hold" strategy here. I am also focused on terribly un-sexy things like "value" and "dividends". A great return here would be 15%.

Tier 3, for me, is finally the "home run" strategy, that ideally produces a Peter Lynch "10 bagger". It is super risky, and generally speaking is growth focused (though not blind to price) and will definitely engage in profit taking. My Mastercard (MA) pick from earlier this year falls into this category. Please note, I wouldn't touch MA with a ten foot pole now, unless I was feeling really daring and thinking "short." I'll recount the history of that pick, and the actual returns (a friend of mine executed my strategy). I don't invest in Tier 3 opportunities unless Tier 2 is "fully funded" (more on that another time as well). The target return here is 30% or better.

The overall idea here is that excepting un-mitigatable risks (e.g. nuclear war), Tier 1 leads you to a comfortable retirement, at a decent age, even if you lose money consistently chasing higher returns in Tier 2 and 3. Hopefully that gives you some of the context you'll need to make sense of the Citigroup post (coming right up).