There is more than a little bit of the contrarian in everyone. No one wants to be just a member of the crowd. Most investors would like to be able to claim moments of unusual insight, when their conviction that market consensus was simply wrong turned out to be simply right. For the rewards, when a contrarian stance proves correct, can be substantial.
challenges of the era seem to have increased interest in contrarian approaches,
and investment commentary has certainly taken on an increasingly contrarian
tone. But the last couple of years have not been especially kind to ‘contrarian’
investment strategies. Plenty of experienced managers have struggled, as approaches
such as value investing and cyclical timing have been found wanting.
Periods of change and uncertainty do throw up contrarian moments. There have been some in recent years, as markets have see-sawed this way and that after the financial bubble burst. Think of March 2009. In retrospect it may seem that post-Lehman sentiment had become so negative that a very powerful sentiment reversal was inevitable. But that is only hindsight: at the time it took a rigorously contrarian cast of mind to believe that here was the moment to invest in an uptick.
The image of the dogged contrarian, with the guts and conviction to invest in the teeth of the prevailing consensus, is always going to be an attractive one.
And that is why it can also be dangerous.
But first let us ask what is good about the contrarian philosophy. If you believe that markets mis-price assets, and that outperformance is all about seeing such imperfections in the market and acting on them, then investing against market sentiment has to be an essential part of your tactical toolkit. To that extent, taking contrarian views is what you do. And the risk is that if you are not willing to act contrary to the consensus, your returns will often be no more than average.
But it should never be all that you do. For there is no such thing as a long term contrarian position. Even the contrarian wants the market to move the same way as he is moving – it is just that he wants the market to follow him, and not the other way around. Over time, the aim is for every contrarian investment to cease being a contrarian position, and become a consensus one. It’s all a matter of timing.
So pure contrarianism is overrated, because it is not a strategy. It is a method of mind, and a very useful one. It is no bad thing to cultivate the habit of asking whether the truth is the opposite of what the majority believe. Every investor should have a contrarian within. But every investor should also keep that contrarian under the very strictest control.
For the contrarian habit can be a little bit too addictive for comfort. The pathological form of contrarianism is what you might call contradictionism. Just scan the columns in the financial press, and you will see plenty of that.
Bullion is at an all-time high and seemingly heading higher? Time to sell bullion, quick. Emerging markets are everyone’s favourite flavour? Time to dump everything emerging that you have. Profit forecasts have been downgraded heavily? Get ready to press the buy button.
None of these views have to be wrong. But if they are merely based on automatic contradiction of the consensus, they are not likely to be profitable. You cannot invest exclusively against market sentiment and make money.
In fact, it is an enduring paradox that the independent investor must always be ready to agree with the way the market is going. It is not an attention-grabbing position to hold, but often enough it is the right one. Contrarianism is founded on strong views about market sentiment, but strong views are not always appropriate. It takes strength of mind to insist that there can be times when you have no strong view about the direction of the market.
Saying the market has got it all wrong might seem a lot easier, just because it makes you stand out from the crowd. That is why one must always beware giving too much scope to the contrarian within. The contrarian is an attack dog, and very useful he is too when it comes to sniffing out the lazy consensus that lies behind the mis-pricing of assets and the misreading of macro trends. But like any dog he needs to be well-trained and well-managed.
It is good to keep that contrarian dog healthy and hungry at all times. He has important work to do. But he needs to be on a pretty short leash too. Not every shadow is a rabbit to be chased, and not every consensus is wrong.
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