Readers may have heard the phrase ‘contrarian’ with reference to a certain fund manager or investment style. Generally this implies taking decisions that are at odds with the perceived thinking of the majority.
NotHarry has a T shirt with a quote from Mark Twain that goes something like this: ‘if you find you are one of the majority, it is time to stop and think again’. That would suggest merit in challenging the accepted wisdom. On the other hand the gurus of behavioural psychology point out that the ‘non thinking’ or at least not conscious thinking part of the human brain drives far more of what we do than the analytical, logical part, which makes a case for investing on what is usually called a ‘momentum’ basis, or following the herd.
The question then arises: is it good to be a contrarian in the long run? Absolutely! But….
The way a contrarian is able to increase the odds of success in investing is to keep the analytic part of their thinking process switched on at all times. Investing with the momentum makes sense if you get in at or near the start, like a surfer spotting the next big roller some way off the beach. But you need to know how long to stay on the peak and when to safely get off. Better to exit gracefully than crash out and get caught in the undertow.
A good contrarian investor is not someone who just buys cheap out of fashion assets, although that can be part of the process. The contrarian assumes the majority view is wrong until they have proved to themselves that it is not, or even that it is wrong but will push share prices up for a while! Above all the contrarian (maybe without actually knowing as much) understands that behavioural biases influence investment markets and clichés and simplistic rules of thumb are not an intelligent way of building a portfolio.
I will finish with an example. It is widely believed that electric vehicles are the future and indeed there is concrete evidence of reduced sales of diesel cars. A simple view might be to invest in Tesla or another car manufacturer with a stated specific total commitment to electric cars, and so sell or even ‘short’ holdings in businesses like Volkswagen, Nissan or BMW. A contrarian would perhaps argue that with the most advanced production facilities in the world, these latter companies could switch to making electric cars much faster and at lower unit cost than a new player who will have to purchase vast amounts of capital equipment and learn the process. So the contrarian would take advantage of bad news about diesel car sales resulting in lower share prices for a well run ‘traditional’ car company to build a stock position, especially if they can see from thorough research that plans for a major switch of production are already well under way.
In my view being ‘contrarian’ is simply a matter of fighting the human tendency to be one of the pack and keep your intelligence turned on all the time. If you can do that, you will have a lovely show of investment blue bells and cockle shells.
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