The Power of The Contrarian: Investing Beyond Fashion Trends

The Contrarian Approach: Navigating Beyond Fashion Trends in Investing

Updated Dec 2022

Do not try to be a contrarian; if you constantly have to make an effort, you fall under the “fashion contrarian” category. This usually happens because you woke up one day, read a random article on the subject, tickled your fancy, and then decided that this was something extraordinary. Contrarian investing is not about being cool; it is about doing stuff that is not cool. Hence being fashionable goes against everything a true contrarian stands for.

Your focus should be on standing apart from the crowd and doing things the group does not find fashionable or acceptable. Regarding investing, this means getting into investments that are not considered hip or not on the crowd’s radar screen. This saying we coined is apt for this occasion.

“be wary when the crowd is joyful and happy when they are not.”

The False Contrarian: Navigating Fashion Trends in Investing

The keyword in the above sentence is “appears”; contrarian investors do not embrace a site or some strategy just because it has a contrarian bent. They check the details of the strategy and then compare it to their ideology, and if there is a match, they will look deeper into it. Fashion contrarians don’t even know what contrarian investing entails; the concept just enamours them, so any snake oil salesman can come along and sell them a nice story.

The Contrarian Edge: Unlocking The Contrarian Methodology

First of all, most of the so-called contrarian websites are nothing but contrarian fashion sites. They are just repackaging old ideas and spinning them for the most part. You have to spend time understanding which sites contain valuable data and which sites do not. This means putting aside a certain amount of time every week to find 2-4 websites with data not being broadcasted on popular financial sites. If it’s too popular, you are coming in towards the end of the party.

If you combine the concept of contrarian investing with the idea of Mass Psychology, you take the whole game to another level. The field of mass psychology is not widely known regarding it being applied to the financial markets. A few places are putting out this information, but for the most part, they do not understand the principles of mass psychology well. Often these sites confuse contrarian investing with the principles of mass psychology.

Essential Considerations for The Contrarian Investor

Don’t look for investment ideas on Popular sites

if you are trying to get investment ideas from these sources; 9 out of 10 times, you will lose money. These sources should serve as guidelines for what investments to avoid as opposed to getting into

Do not try to be part of a group

In other words, you should be a loner when taking a position. If you are seeking approval from the crowds, you are most likely making the wrong decision.

Do not speculate

contrarians do not speculate until they make money, and even they are careful about doing so. Only use profits to speculate and only deploy small amounts of capital into speculative investments.

Do not buy the Warren Buffet nonsense mantra of buy and hold until the end.

You will never get the special deals he gets, and he is playing with other people’s money, and you are not. There is no such thing as buy and hold forever. There is buy and hold for a specific time; then you fold and re-open the position later.

Do not fall in love with your investment or get emotional over your position.

You need to be indifferent; it’s just a piece of paper, and when the time comes, you close the position and move on to greener pastures.

The Contrarian investor focuses on turnaround situations.

In other words, a new trend is about to begin or end (more aggressive contrarians will short stocks and the market when the trend changes course). One of the key things they look for is well-financed companies that are growing at a decent rate and that the markets are undervaluing for the wrong reasons. The masses are either ignoring these stocks or openly dislike them.

Contrarian investing is a stable form of investing; contrarian investors do not rely on experts to help them arrive at a decision. They already know what they want, and when they spot it, they methodically start to open positions in that stock. Again there is no room for emotions at all.

We have explored the concept of contrarian investing in this recent article titled seven rules for successful contrarian investing.

Why Do most individuals lose money in the Markets?

When they think about “stock picking” most people are combing through a newspaper or their eTrade account and hunting for “winners.” And this process of hunting for winners typically involves reading CNN Money, picking up hot stock tips from your idiot co-worker, and outright guessing

Legendary investor Benjamin Graham described the stock market like so:

In the short run, a market is a voting machine, but in the long run, it is a weighing machine.

He said this because the market is millions of people pushing individual stock prices up and down with their buys and sells, like up-votes and down-votes in a Reddit thread. When investors believe a stock is worth more than its current listing price, they buy. When they think it’s worthless, they sell. The idea is that this will eventually cause a stock’s price to settle to somewhere around its “real” value.

The problem is, it didn’t take long for Wall Street to realize that unsophisticated retail investors (i.e. us) are easily manipulated, and they soon figured out ways to exploit that. They’d find ways of getting access to news stories before they go public, or worse, completely fabricate stories themselves by leaking fake crap to the press, then get into positions that make them money as the retail investors (us) flood in, then use options or short selling to make money as the stock plummets when everyone discovers the stories were all hot air. They rig the market by manufacturing volatility and then profiting off that volatility. Full Story

Contrarian Investing Ideas to explore

As Oaktree Capital Management’s Mr Marks aptly notes, the most profitable investment actions are contrarian. This means buying when everyone else is selling (and the price is low) or selling when everyone else is buying (and the price is high). While this strategy does not guarantee success, it can tip the risk/reward balance in the investor’s favour, setting up an asymmetric bet.

However, it’s important to restrict how far you’ll vary from your Strategic Asset Mix (SAM). If you need to invest in an industry you know or pursue a locker-room tip, limit how far you’ll go. For example, if gold is the only thing that makes you feel comfortable, allocate 5-15% of your portfolio, but not 50%. Regardless of the strategy, it must be implemented in a diversified portfolio context.

Another critical factor is to be sceptical of new product offerings. Make sure you understand how they fit into your SAM and why they’re better than what you already have. Rather than searching for something new every RRSP season, look inside your portfolio. Allocating RRSP and tax-free savings account contributions to securities or funds that have been lagging is a contrarian move. Full Story