contrarian

Contrarian is used to describe a variety of closely related classes of people. In general it's used to refer to somebody who holds an opinion opposite to the consensus.¹ This opinion can be political, scientific, grammatical, whatever. In this sense contrarian is a neutral term since the consensus is often wrong. That said, it takes on negative connotations because it's also used to describe argumentativeness for it's own sake either because of reflexive devil's advocacy or just attention seeking.² This is particularly problematic because the second usage necessarily includes the first. Muddying the waters further, among contrarians the term is likely to be seen as a badge of distinction and understood to mean free thinker in opposition to the dogmatic sheeple. Since the word can carry all of these meanings it is worth taking the time to understand both how it was meant and how it is likely to be heard.

<sup>1. Webster
2. Urban Dictionary</sup>

IRON NODER X: XTREME XCELLENCE

A pretty good investment strategy, as far as history shows. A good contrarian would buy things that nobody seems to want to buy and sell things that everybody seems to want to buy - the premise being that the majority is usually wrong.

The opposite of contrarian investing is conventional investing, otherwise known as momentum investing or, less affectionately, as "the greater fool theory". The basic premise of making money is to "buy low, sell high" or, conversely, "sell high, buy low". Most people get this wrong and end up doing "buy high, sell higher" (or hope to sell higher).

Some great moments in contrarian investment history would have included:

• selling RCA at or near the height of the radio craze in 1928 when its value relative to its actual earnings and assets rivalled that of the Internet stocks of recent times
• buying commodity related stocks (mining companies and the like) during the inflationary era of the 1970s
• buying gold and silver during the 1970s as everybody knew that the IMF, U.S. Federal reserve and other central banks were conspiring to keep the price of precious metals down and where gold was only good for "lining the urinals in the Kremlin"
• selling gold in 1980 when there were people literally lined up in the streets, waiting to buy gold which, they were told, were a sure thing to go to US$1600 or US$2000/ounce as inflation was sure to continue to advance
• buying stocks in 1982 when there were front page articles in magazines such as Newsweek and Time announcing the "death of stocks"
• buying technology stocks in 1990 during the Gulf War, having to pick relatively less well known, non-blue-chip stocks during a relative recession and the spiking oil price caused by the war with Iraq
• getting out of real estate in Japan in 1990 when everyone was sure the Japanese economy was going to continue to dominate -- the Emperor's palace in Tokyo was worth as much as California and Tokyo itself was worth more than the entire United States of America.
• selling those same technology and other stocks during the mania period of 1998 to 2000 where contrarians who sold tech stocks were told they "just did not get it" and "do not understand we ARE in a new era"

Learn well the secrets of contrarian investing. Heed not those who tell you (like Michalak below, though he tries to squirm around this point) that it is something that does not work. Good contrarian investors are few and far between but they stand out in the history books.

Updated AD 2001 Feb 28.

/ Contrarian Investment Theory \

The thesis that an investment opinion contrary to the predominant opinion is, other things equal a better predictor of market results than the more popular opinion.

Disclaimer: If you use what is written in any node here as the basis for investing you're a lunatic!

Now Contrarians do not invariably go against the market consensus because the overall direction of the market is almost invariably correct, instead they are trying to find the extremes. That point when investors over correct or become irrationally exuberant.

As always the devil is in the details and so the difficulty is judging what is over or under valued. It might seem simple looking at a history graph with the extreme points, but it is not as clear when looking at present conditions.

Make no mistake, a contrarian strategy can hold large rewards, but it requires a good deal of risk as well. The management of risk is always at the heart of investing. The proposition of any investment is to risk your money (hopefully in a logical manner so it is more than just gambling) in exchange for gains. It is true that there are (a very few) investments are nearly risk free, like US Savings Bonds, but they don't have very high rates of return. To get a high rate of return means a bigger risk and trying to avoid this results in wreaks like that of Long Term Capital Management.

Another problem with some contrarians is their emphasis upon commodities as investments. Lots of money can be made in trading commodities, but holding onto them can make none. Profit is only realized when the pork, gold, wheat, or whatever is sold. If the stuff is bought and then the market does not recover as fast as the contrarian thought he could be stuck with little to no profit.

It is easy to be an armchair general and second guess a historical decision. But when dealing with the here and now it is not as obvious what the right decision is. It would be very easy to guess wrongly and end up getting out at the wrong time. Like two years ago when many arm chair contrarians said it was time to get out because the market was over valued.

But it is also true that the market does get out of whack. People panic or have to sell to cover other investments going bad and so on. So it is not true there is no merit to the contrarian strategy. It just must be made as part of a calm and rational approach to financial investment.