As a Registered Investment Advisor and portfolio manager, I get asked all sorts of investment questions. When I mention what I do for a living and that I follow my own style of value investing, I am frequently asked, “So that makes you a contrarian, huh?” Well, the answer to that is yes and no…and it depends.
A contrarian is someone who goes against the crowds and/or perceived wisdom of the day. In investing, contrarianism leads one to be optimistic when others are pessimistic or vice versa, favoring sectors or companies that are out-of-favor with the investment community, etc. A contrarian might look for characteristics in a company that are usually ignored or even shunned by the general investing public.
Short-Term Contrarianism
As a value investor, I am more likely to be a contrarian with client investments in the short-term. Value investors seek to purchase shares of stock at a discount to what they are intrinsically worth. When markets are frothy and trading near all-time highs, retail and institutional investors tend to pile in with bouts of exuberance. Everyone in your neighborhood seems to be getting rich,
so why miss out?
Professional investment advisors tend to not fare much better, as they don’t want to miss out on short-term performance and lose investors in their funds or wealth management practices. Value investors tend to be cautious during times of strong investor sentiment. Run ups in share prices can lead to shares selling for more than they are intrinsically worth, which is the opposite of what us value investors set out to do.
Conversely, retail investors often panic sell during selloffs and bear markets, wanting nothing to do with ‘risky’ markets until the ‘volatility’ ends. There are reports of drying up 401(k)s, delayed retirements, coworkers losing their shirt after poor investment choices. Money managers will often follow suit, preferring to take losses rather than risk them getting worse and underperforming the competition in the short-term. As a value investor, I tend to get optimistic during drawdowns, as price decreases tend to mean there are more excellent companies with characteristics I look for selling for less than they are worth. I don’t run out of the store in a panic when something I want goes on sale, so why do folks do the same with the stock market?
It's all but impossible to predict the movement of stocks or the markets in the short-term, and given the irrational nature of market movements, I tend to be skeptical of what comes across my desk day-to-day.
Long-Term Optimism
With a longer time horizon, the more optimistic and ‘conventional’ I become. If you look at stock market returns from the last century or so, the long-term index return averages around 10 percent (1). This long-term trend line is remarkably consistent despite the economic depressions, recessions, wars, pandemics, bouts of inflation, deflation, deficits, surpluses: you name it, the stock market tends to eventually chug along through it and end up appreciating. The stock market has its good years and bad (good more often than bad). But if you buy an index fund or a portfolio of competently selected securities and - this is key - stay invested for decades?
History indicates you’ll do quite well for yourself, and I think that trend will continue. The prevailing wisdom among money managers and writers is to stay invested through good times and bad. This gives rise to phrases such as ‘time in the market beats timing the market.” With this, I agree wholeheartedly! In my opinion, market timing is generally a fool’s errand. Books and movies like The Big Short glamorize this concept, but you are much more likely to just end up sitting on the investment sidelines for years, missing out on positive investment returns the markets have experienced in most years.
There will be silly decisions and speed bumps and crises you won’t remember along the way. But as long as you don’t need the money in the next several years, try to stay invested don’t try to time the market. Keep your head on straight, and try to make more good decisions than bad ones. Remember, pessimists may sound smart, but optimists get rich!
In closing, contrarianism and standing out from the crowd can lead to great returns in the future and steer you clear of investing calamity in the short-term. In the long-term, be a market optimist and your future self will thank you.
(1.) Jeremy J. Siegel, Stocks for the Long Run, New York: McGraw Hill, 2023, 6th edition, 94.
Disclaimer
Investment advisory services offered through Stein Financial LLC, a Registered Investment Advisor. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment advisor does not constitute an endorsement of
the firm by securities regulators nor does it indicate that the advisor has attained a particular level of skill or ability.
Information in this article does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information on products and services. A professional adviser should be consulted before implementing any of the options presented. All investment strategies have
the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy and results of your portfolio.
"A contrarian might look for characteristics in a company that are usually ignored," Bennett Stein.