In the plains of the African national parks an event gets played out on a daily basis. The moment an impala or a deer senses danger and starts running; the rest of the herd also joins the run. Many in the herd will not even know what triggered the running. Similar scenes can be observed in the plains of our stock markets too.
In times of euphoria, many investors are extremely eager to join the party by buying stocks of even unheard off companies. The moment any event that causes panic sets in, many investors wish to run away from the party in droves, even selling their core portfolio.
Doing the exact opposite of what the crowd is doing is what contrarian investing is mostly about and one, which gives the investors a better chance of profit.
Contrarian Investing is an investment strategy that is characterized by purchasing and selling in contrast to the prevailing sentiment of the time. A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricing in securities markets.
Doing the exact opposite of what the crowd is doing is what contrarian investing is mostly about and one, which gives the investors a better chance of profit.
Contrarian Investing is an investment strategy that is characterized by purchasing and selling in contrast to the prevailing sentiment of the time. A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricing in securities markets.
Standing out from the crowd, many investors globally have built a reputation by betting against the market expectation.
These Contrarian Investment Gurus are now known for their alternative bets, which have given enormous returns.
One of the most famous quotes of Contrarian Investing is by warren Buffet:“Be fearful when others are greedy and be greedy when others are fearful.”
Lets look into who and why did these Gurus use this strategy and how they created their own space in the investing world by going against the tide.
These Contrarian Investment Gurus are now known for their alternative bets, which have given enormous returns.
One of the most famous quotes of Contrarian Investing is by warren Buffet:“Be fearful when others are greedy and be greedy when others are fearful.”
Lets look into who and why did these Gurus use this strategy and how they created their own space in the investing world by going against the tide.
One famous contrarian investor, who was successful in bringing the Bank of England to its knees, is the legendary hedge fund manager George Soros.
The European Exchange Rate Mechanism (ERM) was set up in 1979 to reduce exchange rate variability and stabilise monetary policy across Europe. In 1990, Britain decided to join ERM in a view of unification of the European economies. But ERM had set an upper and lower limit within which exchange rates could fluctuate. Post joining ERM, Pound Sterling had an upper and lower limit of 6 per cent. However, the problem was that inflation in Britain was around three times higher than Germany and its economy was entering a phase of unsustainable growth, which added to the country's woes.
George Soros watched this scenario closely and he started taking a short position on Pound. On the other hand, to lure market participants and stop shorting of Pound, the government announced shocking rate hike from 10 per cent to 15 per cent. Unfortunately, the market did not take this move enthusiastically and Pound continued to fall, and the later government decided to withdraw itself from the European Exchange Rate Mechanism as it was losing billions and let the market revalue its currency to a more appropriate rate. Following this, Britain's economy suffered enormous losses and had to go through a massive slowdown.
From shorting Pound Sterling, Soros made a gain of nearly US$1 billion.
The most famous Contrarian Investor is the Legendary Warren Buffet, who ranks amongst the richest in the world. He has a large following in the investor community worldwide.
One of his contrarian bet led to a profit of nearly $US 20 million.
In 1963, Warren Buffet invested in American Express, which was in news for all the wrong reason. The bank had provided credit to Allied Crude Vegetable Oil considering its inventory of soybean-based salad oil. The inventory was kept on container ships thought to be full of salad oil. Actually, the containers were filled with water and had only a few feet of salad oil on top. Since the oil floated on top of the water, it appeared to inspectors that these ships were loaded with oil.
This scandal led to a loss of nearly US$58 million for American Express and triggered the fall in its share price.
But Warren Buffet conducted analysis in his own unique style and found that American Express competitive advantage and cash-flow generating capabilities were intact and the scandal did not stop people from using green cards issued by American Express.
Buffet bought nearly US$13 million shares of American Express and made nearly US$20 million profit post divestment of his stake in the company.
Warren Buffet has made a six-decade career out of buying boring but highly profitable companies at cheap or reasonable prices. He bought a struggling newspaper company, a chewing gum company, a bunch of banks, and a hundred other companies like that.
While everyone was loading up on overvalued tech stocks in the late 90’s, for example, he skipped that and bought 130 million ounces of Silver instead, which was at its historical low point. When the financial sector collapsed in 2008, he bailed some of them out, structuring very profitable deals for himself.
One of the best contrarian investors in the 20th century was Sir John Templeton,
who founded the Templeton Growth Fund; He started investing at a very early age. In 1939, he begged for a loan of US$10,000 and managed to get the same. He invested this amount in 100 stocks, which were trading below one dollar per share. This was a time when the Second World War started and the world was at the end of the Great Depression. Then he just kept an eye on those 100 stocks, which led the US out of the Great Depression. From his investment in 100 stocks, 34 companies went bankrupt, but the rest of the stocks fetched him a staggering 400 per cent return over the next five years.
His other famous contrarian bet was his investments in Japan in the '60s, when it was totally out of favour and no one really thought of investing there. Later, he also made huge profits from the tech bubble in 1999 by taking short positions in technology stocks.
Even in times of economic distress like during the 2008 housing bubble, contrarian Investment strategy has generated fortunes for smart Investors.
The best-selling book, “Big Short” describes the 2008 crisis and there is also an Oscar winning movie by the same name.
The story revolves around Michael Burry, manager of Scion Capital, who recognised in 2005 that the US housing market is going through a tough time and there is a serious threat of default in high-risk housing loans, which was later known as the sub-prime crisis. Michael Burry liquidated his position in April 2008 and generated accumulated gain of nearly 490 per cent.
We cannot always follow the trend; sometimes you need to take contrarian steps. However that requires a skill to detect a change in trend and also the conviction and courage to act on it.
Seth Klarman generated more than 16% annualized returns for over three decades, by analyzing the liquidation value of companies, and buying struggling companies at such low prices that his risk is kept at low levels.
Irving Kahn another legend, doubled his money from the 1929 market crash. He recognized the bubble, shorted it, and made a killing, and went on to become the oldest active investor in the world until his death in 2015 at 109 years of age.
Bill Ackman is known for his high-profile short positions and activist investing. In the early 2000’s, for example, he began noticing the growing problem with credit default swaps and mortgage-backed securities, so he shorted MBIA, a major insurer of mortgage-backed securities. For several years, his investment didn’t pay off, until 2008 when the company’s value utterly collapsed and he walked away a much richer man.
India has also had its share of contrarian Investors and bets which have generated mega returns in the form of Eicher Motors, Wipro, Page Industries, Bajaj Finance, Titan, Havells, Symphony, TTK Prestige, Relaxo footwear and many more.
The most celebrated Indian investor is also famous for his contrarian strategies. Rakesh Jhunjhunwala, who is known for his risky investment bets, has made a huge fortune from his investment in Titan.
In the year 2002-03, Jhunjhunwala invested nearly 6 crore in Titan that too at Rs. 3 per share and over the years, he increased his stake and now Titan is trading at around Rs. 1,250 per share, resulting in huge wealth creation for Jhunjhunwala.
Titan's net sales were at Rs. 60.5 crore in March 2003 and have grown strong to reach Rs. 19,800 crore in March 2019.
We can go on and on with such examples; but for every successful example, there must be thousands and millions of unsung heroes who couldn’t make it and profit from their bets, because they made an exit too soon or had a leveraged position or couldn’t face the temporary downturn in their bet.
However, it is amply clear from any analysis of the markets that Investors created wealth when they invested during tough times and when they invested against the tide.
That reminds us of the famous quote of Baron Rothschild, who said, “the time to buy is when there's blood in the streets." Rothschild also made a fortune, buying in the panic that followed the Battle of Waterloo against Napoleon in the 18th century.
The strategy of dispassionately looking for value generally places you on the wrong side of the majority, which is a good thing.
There are many possible ways to practice a contrarian investing strategy. In an article on this topic, Prof. Aswath Damodaran, the renowned valuation expert, has listed four possible contrarian strategies one can adopt:
Biggest losers Buying into the biggest losers hoping that when the overreaction recedes, the stock will revert to the mean or normal levels.
Collateral Damage: This strategy is to look at situations where the market or a sector has turned negative, dragging the fundamentally sound stocks along with it
Comeback bet: This strategy involves analyzing the reasons for a drastic fall in price of a stock and taking positions in the security if you believe the reasons are temporary and fixable in nature.
“Long Odds” Option: This strategy involves analyzing the security (whose price has fallen for right reasons and there is no hope of a turnaround) to see if they have some proprietary technology, license, product that will increase the value of assets in the future.
Biggest losers Buying into the biggest losers hoping that when the overreaction recedes, the stock will revert to the mean or normal levels.
Collateral Damage: This strategy is to look at situations where the market or a sector has turned negative, dragging the fundamentally sound stocks along with it
Comeback bet: This strategy involves analyzing the reasons for a drastic fall in price of a stock and taking positions in the security if you believe the reasons are temporary and fixable in nature.
“Long Odds” Option: This strategy involves analyzing the security (whose price has fallen for right reasons and there is no hope of a turnaround) to see if they have some proprietary technology, license, product that will increase the value of assets in the future.
All the key considerations for successful contrarian investing have been beautifully summarized by Howard Marks in the July 2013 memo to his Oak tree clients:
To be a successful contrarian, you have to be able to:
To be a successful contrarian, you have to be able to:
i) See what most people are doing,
ii) Understand what’s wrong about most people’s behavior,
iii) Possess a strong sense for intrinsic value, which most people ignore at the extremes,
iv) And resist the psychological pressures that make most people err, and thus,
ii) Understand what’s wrong about most people’s behavior,
iii) Possess a strong sense for intrinsic value, which most people ignore at the extremes,
iv) And resist the psychological pressures that make most people err, and thus,
Buy when most people are selling and sell when most people are buying.
Before we kid ourselves to do a Buffet and search for our own Goldman Sachs or American Express like contrarian investing bet, let us remind ourselves of an old quote by the legend himself:
“Investing is simple but not easy” – Warren Buffet
This is equally true of contrarian investing also.
“Investing is simple but not easy” – Warren Buffet
This is equally true of contrarian investing also.
All this makes it a high-risk strategy for the common investor.
For the impala or deer in the plains of Africa, safety is in the numbers. In the eventuality of isolation from the herd their chances of survival becomes bleak.
For the impala or deer in the plains of Africa, safety is in the numbers. In the eventuality of isolation from the herd their chances of survival becomes bleak.
Contrarian investing strategy can be extremely rewarding with possibilities for large profits when you get it right. It is a particularly useful investing strategy during periods of bubbles and extreme market over-reaction.
A large bet on a contrarian investment idea has the possibility to deliver windfall profits; It’s the equivalent of a jackpot or a royal flush in a poker game but adopting a contrarian approach blindly just for the sake of not following the herd can be an equally foolish thing to do.
Contrarian Investment strategy also calls for a deep understanding of the market, knowledge about emerging sectors and companies which can deliver in the long run, apart from a lot of courage, ability to invest for the long term and conviction in your favourite idea.
You have to have the Patience to realize the full value of your bet because as
John Maynard Keynes famously said, “The market can stay irrational longer than you can stay solvent.”
John Maynard Keynes famously said, “The market can stay irrational longer than you can stay solvent.”
It may take a very long time for the market to fall in line with your idea.
In the Indian context, Eicher Motors is a classic example of this. During early 2000, many thought Eicher motors was finished as the sales was floundering. The company was spectacularly revived and the share price moved from 220 in 2004 to touch a peak of 31000 in 2017 despite remaining at the 200 levels till 2009.
When people think of contrarian investing, they often think of high risk, high reward strategies, but that’s not necessarily the reality. What really counts is extensive research and deep conviction.
We suggest, you consult your financial advisor before you take a major contrarian bet, if for nothing else, only to get another perspective or reinforce your strategy.
Happy Contrarian Investing!
Stay Blessed Forever
Sandeep Sahni
Stay Blessed Forever
Sandeep Sahni
Note: All information provided in this blog is for educational purposes only and does not constitute any professional advice or service. Readers are requested to consult a financial advisor before investing as investments are subject to Market Risks.
About The author
Sandeep Sahni
Sandeep is an alum of IIM Lucknow with a Post Graduate Degree (MBA class of 1988). His also an alum of Shri Ram College of Commerce, Delhi University (B.Com. Hons. Class of 1985.)
Sandeep's investing experience and study of the Financial Markets spans over 30 years. He is based in Chandigarh and has been advising more than 500 clients across the globe on Financial Planning and Wealth Management.
He has promoted “Sahayak Gurukul” which is an attempt to share thoughts and knowledge on aspects related to Personal Finance and Wealth Management. Sahayak Gurukul provides financial insights into the markets, economy and Investments. Whether you are new to the personal finance domain or a professional looking to make your money work for you, the Sahayak Gurukul blogs and workshops are curated to demystify investing, simplify complex personal finance topics and help investors make better decisions about their money.
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Through his interactions and workshops, Sandeep works towards breaking the myths and illusions about money and finance.He also writes a well read blog;
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