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The Intelligent Investor

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As a contrarian investor, advisor John P. Elwood has carved out a niche turning long-term losers into winners. Now in his 40th year in the business, he’s a traditionalist who still refers to clients as “customers.” Old-fashioned stockbroker? Yes. Apologetic? Absolutely not.

“It’s what I do,” says the 66-year-old Elwood, a first vice president with RBC Wealth Management in Chicago. “It’s what I do well.”

Elwood, who has $50 million in assets under management, searches for companies with good fundamentals whose stock price has slid from its peak roughly seven years earlier. Seven years isn’t “magical” or “Biblical,” as Elwood puts it, but it tends to parallel business cycles.

Elwood’s investing philosophy dates back to the mid-1970s when he studied the stock charts of 250 companies from 1920 to 1970. His takeaway? “The growth of U.S. stocks is marked by some rather lengthy cyclical departures, and many companies go through this pattern two, three and four times in their history,” he says. “It became hugely apparent that cyclicality is the norm and that seven years is a good number to play off of.”

In the years since, Elwood has demonstrated that long-term losers aren’t always long shots. In the late 1990s, for example, he made good bets on oil, gold and international equities by positioning assets in their direction.

Gold rose, oil rose and international equities came back into favor.

“I don’t wait for someone to ring the bell,” Elwood says. “When they ring the bell, it’s way late.”

What does his contrarian approach suggest about investing strategies today? It’s back to the future with sectors that peaked in 2000: technology, large-cap growth stocks, pharmaceuticals and telecommunications. Meanwhile, he views commodities and the “energy complex” as bubbles that are about to burst. “In my mind, this is an extension of excesses,” he notes. “This is somewhat akin to what happened to technology, media and telecommunications — and I think we’ll see it in 2009.”

Elwood’s firm won’t permit him to identify particular companies he’s investing in or to reveal his track record, which he describes as “very adequate.” Specifically, he says the years from early 2000 to late 2006 were the best seven years he’s ever had in the business. Why? He didn’t own one technology stock. The most difficult period: mid-1998 to mid-1999, when he was buying what was out of favor while watching the excesses mount in large-cap growth and Internet stocks and the “mania” that accompanied the tech bubble.

It’s notable that in 2000, when Elwood was undergoing an admittedly tough period because he declined to participate in the heady market, he was awarded the Dalbar Financial Professional Seal with clients giving him the highest rating possible for the quality of his advice.

“This is a strategy that challenges your patience beyond belief. It can drive you and your customers nuts,” he acknowledges. “But I never second-guess myself. I invest this way for myself. It gives me goose pimples to see how these things correlate over time. There’s a leap of faith, I agree, but there’s a leap of faith on somebody’s growth estimates, too. Of the various risks you have to assume, these are the kinds of risks I feel more comfortable with.”

Elwood joined what was until recently known as RBC Dain Rauscher in 1998 after working 18 years as a stockbroker with Prudential. He got his career start at two smaller brokerages. Today, Elwood continues to describe himself by an old term: “the customer’s man.”

Peter Wendell, who served as Elwood’s manager for three years, calls him an “old-time broker” who does independent research, both quantitatively and qualitatively.

“In my book, he does it the right way,” observes Wendell. “He really cares about what he’s trying to do for his accounts and I think he’s quite successful at it. He’s extremely diligent and he never compromises his values. To me, that’s the mark of a good broker.”

Elwood typically loads between 25 and 35 stocks in a portfolio, with an average holding period of two to three years. When he screens a stock, he focuses on 10-year price-to-sales, price-to-book value and price-to-cash flow ratios. “It’s all part of the fundamental analysis,” he says. Day to day “wiggles and jiggles” don’t mean much to Elwood. More important is what company management is doing to return its stock price to a value proposition.

“The pressure of a down cycle on management to return their company’s assets to more normalized returns becomes very great. On the other side of the equation, after a lengthy period of growth the pressures to keep it going tend to cause mistakes, sometimes outright fraud,” according to Elwood. “The pressures of a down cycle tend to lead to conditions to refurbish the assets, and then the assets find a way to get in sync with markets. Sometimes, the degree of the downturn equals the degree of the upturn. And out of a 25-to-35 stock universe, there’s always something that’s starting to do better sooner than you think and there’s always one that stays down longer than you’d like. Frankly, I would rather take that risk than take the risk of someone’s growth estimate falling short.”

Some years ago, a mutual fund manager told Elwood he was nothing but a cigar-butt investor after a long conversation about contrarian investing.

“The way he talked, he sounded like I should be ashamed of it,” says Elwood. “But if there’s a good Havana lying on the street with three or four good smokes left, you pick it up. To me, it’s that simple.”


Freelance writer Ellen Uzelac is based in Chestertown, Md.; the former West Coast bureau chief and national correspondent for The Baltimore Sun, can be reached at [email protected].


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