I speak Japanese. Japanese was one of my majors at college. To the average native English speaker, Japanese is a tough language, offering very little comfort and familiarity that might come with trying to learn Spanish, French or German. In addition to three different writing systems to learn, the grammar and sentence structure of the language seem very foreign to most English speakers. As a character in Shogun, James Clavell’s great novel about Japan, famously said, “The best way to learn Japanese is to stand on your head and think like a pretzel.”
Maybe learning Japanese has re-wired my brain, or perhaps I was born this way, but regardless, I am a contrarian investor. That is to say, I generally lean against consensus thought and find my own personal comfort swimming against the tide. Although some surveys suggest that a large majority of investors consider themselves contrarian, which is mathematically impossible (the majority opinion would be the consensus, duh), I think it much easier to consider yourself a contrarian investor than actually to be one.
Here’s an easy test of one’s contrarian investor credentials: In March of 2009 were you 1) buying stocks, 2) selling stocks, 3) numb with fear? If you chose number one, you are probably a contrarian investor. If you chose 2 or 3, you are probably a well-adjusted, normal person. At that time, the majority opinion was that this crisis is possibly the worst ever and selling risk assets and holding cash is the only prudent tactic. I recall hearing some “guru” on the radio say that the stock market “may never recover from this crisis.” To the contrarian investor, this kind of hyperbole is music to the ear. Whenever any opinion becomes so widespread as to be assumed to be true (or even self-evident) by the vast majority of regular people, it’s time for the contrarian investor to start looking the other way.
As I thought about how best to explain contrarian investing, I decided to conduct a casual poll of my colleagues here at work. Our firm provides tax services and wealth management/financial planning services. Most of the people here are either tax specialists or investment specialists. I asked everyone in the office yesterday one simple question: “In your opinion, what would be the worst way to invest your money right now?” As I expected, the answers were divided clearly between the tax staff and the investment staff.
Everyone on the investment side had the same answer – “long-term bonds.” Given that individual investors continue to stock up on bonds in record numbers (implying that the consensus opinion on bonds is bullish), this answer is highly contrarian, and probably right, in my view.
The people on the tax side offered a broader range of answers: Spain, Greece, bank stocks, real estate, commodities, gold, and so forth. What do these things have in common? They have been in the news lately and have been lousy investments either in the short term (gold, commodities) or for a long time (real estate). To me, this suggests that these folks are “normal.” That is to say, they have a general idea of what’s working and what’s not, but they do not spend all day looking at the markets trying to assess what to do next. That’s what I do all day. Maybe I am “abnormal.”
But in a way, that’s the whole point of contrarian investing – going against the crowd, willing to be the lone voice in the wilderness.
As a contrarian investor, the list of my colleagues’ “worst investment” ideas may represent a “shopping list,” a place to consider for investing. Just because an asset has performed poorly does not mean the contrarian investor will reflexively buy it. U.S. real estate has been underperforming for five years. Anyone who bought it four years ago (thinking it was a contrarian move) would have been proven wrong. But looking for unloved and out of favor assets is a good starting point for the contrarian investor.
Being a contrarian investor does not assure success, it simply skews the odds a bit in one’s favor. Assessing the consensus opinion and looking for some possible gems among the dirt of negativity is the job of the contrarian investor. It can be at times messy, but the rewards are usually worth the effort.