In the dead of night of May 2, 2011, two Blackhawk helicopters touched down outside a dilapidated house in the small city of Abbottabad, Pakistan. Upon landing, the team of Navy SEALs aboard moved quickly to execute their mission. In just under 40 minutes, the SEALs had completed their objective and vanished into the darkness.
Hours later, President Barack Obama addressed the nation, sharing the news that Osama Bin Laden had been killed. Families sat awestruck in front of their televisions, District-area students rushed to Pennsylvania Avenue to cheer, and collectively, the nation breathed a sigh of relief.
Steven Cortes, an analyst for CNBC’s “Fast Money,” graduated from Georgetown in 1994 and was one of the many surprised by the mission. Yet, as he sat at his home in Chicago that summer night, Cortes didn’t remain in awe for long. He reacted swiftly and bought up United States currency.
Most of Cortes’ financial colleagues and acquaintances quickly branded his investment as risky. The dollar’s Euro exchange rate hovered at a paltry .673, not far off historic lows precipitated by the 2008 financial crisis, and recent economic data had done little to assuage investors’ fears over the weakness of the nation and of its currency.
Cortes was defying mass opinion; he was going against the herd.
This was not the first time Cortes had invested against prevailing Wall Street sentiments, and it would certainly not be his last.
Ten months later, Cortes still holds the dollar, which has risen to an exchange rate of roughly 0.76 against the Euro. He took a risky chance and in less than a year, his investment had grown by nearly 15%.
“What SEAL Team Six did was remind the investing world that the reserve currency does in fact default to the world’s strongest military, and the United States pulled off an exercise that night which no other country on earth could even fathom,” explained Cortes to a Georgetown audience on Feb. 28. “Going secretly into a sovereign country that far from home, hitting a target, removing it and doing all of it successfully.”
Upon leaving the Hilltop in 1994, where he was a defensive lineman on the football team, a Baker Scholar and a candidate for the Rhodes scholarship, Cortes entered the world of investing.
For four years, Cortes worked for Prudential selling government bonds before branching off on his own to found Veracruz LLC in 1998. Today, he provides investment strategy for individual investors, contributes regularly to CNBC’s “Fast Money” and, most recently, he writes. This past December, Cortes published his first book — Against the Herd: 6 Contrarian Investment Strategies You Should Follow.
After years in the financial sector, Cortes began to see an alarming pattern. He explained, “The mainstream media, the financial press and Wall Street were often wrong in their thinking and leading investors down a dangerous path.” He believes this cohesion of opinion pushed investors to a dangerous herd mentality that was responsible for devastating financial bubbles, seen most recently in the U.S. housing seen most recently in the U.S. housing and technology sectors.
“As human beings, we are evolutionarily wired to seek safety in numbers,” he said. “And while that made a lot of sense while we were in some jungle or some forest trying to escape from predators, that psyche, that ingrained predilection is a serious problem when it comes to investing.”
Cortes soon developed into a self-described contrarian investor. Often at odds with the majority of financial pundits, his calculated skepticism over conventional wisdom has led Cortes to financial success, giving him experience that he now hopes to share.
Cortes visited Georgetown to lecture on his contrarian investment strategies discussed in his book Against the Herd. While he presents six contrarian challenges, Cortes’ focuses on what he perceives as a financial bubble in emerging markets.
Most analysts see emerging markets such as China as a prime area for growth in the coming decades. China has a strong government, ranks second in number of global billionaires, and boasts a massive population which provides inexpensive labor.
To Cortes, China’s “power” is a slowly crumbling facade. He believes investors are wrong in viewing China as a growing economic superpower and instead urges them to invest in a United States that is only beginning its reign of economic dominance.
While China is a wealthy country, as a whole it is an incredibly poor country akin even to parts of sub-Saharan Africa. Per capita, American income is over 10 times greater than Chinese and in a recent poll of China’s wealthiest citizens, 60% revealed plans to leave in the near future.
Cortes argued that China’s authoritarian government, once instrumental in economic success, has already started to inhibit growth. Inefficiencies in central planning are no more evident than in demographics. Because of China’s one child policy, a young female population necessary for continued demographic growth is nearly nonexistent.
Though China certainly does provide inexpensive labor, Cortes believes it lacks a more important component of growth: innovation. He argued, “There is no interest to protect property because they’re not creating any to protect. It is a culture of conformity not creativity.”
While Cortes’ arguments against Chinese supremacy were quite powerful themselves, one graduate student in the audience, who emigrated from China in the 1980s with his wife and children, boosted them even further. The student praised Cortes for his understanding of China’s reality and hoped that the author’s book and lecture would be a wake-up call for American policymakers and investors.
The truth about contrarian advice is that it is often only considered once it is too late.
Cortes hopes that these mistakes will not be repeated with China and other potentially destructive popular opinions. He expects that his book will allow his contrarian opinions to reach the right audience and create skepticism. From here though, it’s up to the American consumer to run with the herd or not.