Why Good Investors Like Bad "Vacation Spots"

If you’re looking for good vacation ideas, you should look for places with positive reviews on any number of websites that offer ratings on hotels, restaurants, and activities. If you want to make money in stocks, however, Validea CEO John Reese says to seek out some unloved “one-star” locales.

“In today’s Internet-centric world, the first thing many of us do before going on a vacation is hit the review and ratings websites – TripAdvisor, Yelp and the like,” Reese writes for Canada’s Globe and Mail. “We want to make sure that we don’t stay in the ‘sketchy’ part of whatever town we’re visiting; we want to make sure that we get to go to the restaurants that provide the most bang for our buck; and if we need transportation to and from an airport or elsewhere, we want to make sure that we are using a reliable service. In short, we want to make our vacation as worry free – and fear free – as possible. Who could argue with that goal?”

But, he says, many of the best investors seek out the proverbial ‘one-star reviews’ when deciding where to put their money. They look for areas that are the subject of economic or geopolitical fear and worry. “That’s because price is correlated with the public sentiment about a stock,” he says. “And while vacationing in a worrisome one-star locale can leave you with bad memories, buying stocks in one-star places can actually lead to great returns.”

Reese talks about the contrarian research of David Dreman, which showed that unloved stocks often fare much better than popular stocks, and he looks at the current contrarian leanings of some top strategists who are high on stocks in regions filled with economic fear, like Europe and emerging markets. “Of course, there are risks in investing in one-star regions; the fact that there are problems in these areas is precisely why stocks are cheap there,” he writes. “For most investors, I think the point is thus not that you should load up exclusively on these types of stocks. Instead, it’s that you shouldn’t avoid them altogether – don’t be afraid to include them within a broader, well diversified portfolio.” Reese also offers a trio of fundamentally sound stocks that come from regions with major fears hanging over them. Among them: Sasol Ltd.