Have you got the guts to invest like a contrarian?

published 16 September 2011

Contrarian investing could be the ultimate game plan. All you have to do is zig as everyone else zags.

The problem is, most people who call themselves contrarians don't have the fortitude to make this sort of investing work for them.

We'll look at the problems of zigging and zagging in a moment. And I'll tell you about one true contrarian who's got what it takes.

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But first.

Are you a contrarian? See if this is you:

You always bet on the underdog. In sport, you don't mind losing the opening rounds that merely presents a tantalising mountain to climb.

You derive great satisfaction from doing things your own way. If Delia Smith says "this is the best way to boil an egg", then the chances are you've got a better idea.

If your favourite stock goes down, then you'll just buy more. Chances are the market's got it wrong!

Revenge is a dish that's best served cold. You are patient and you'll exact your revenge over the long run.

It's easy to mix up contrarian investors with bargain hunters that we looked at in the first part of this series.

But contrarianism has much more in common with the visionary investorthat we met a couple of weeks ago. Like the visionary, the contrarian takes the long view. He looks for turnaround plays (a business set for recovery) and high growth opportunities that other investors shun.

I find contrarian investing compelling. And despite what many investors think, true contrarians are hard to find. They have unique qualities.

A contrarian is often stubborn. But if he turns out to be right, he's quickly re-labelled. Few pundits focused on Sir Edmund Hillary's stubbornness as he and Tenzing Norgay became the first men to reach Mount Everest's summit back in 1953. Hillary became a man of great perseverance steadfast to the cause!

And stubbornness can be a great attribute for an investor. I'd say it's definitely a prerequisite for the contrarian.

Despite headwinds from the markets, the contrarian stays true to his beliefs. He's unlikely to be shaken out of his position just because the markets decide to go the wrong way!

Contrarians often love it when the markets go against them. "The market is wrong and it's giving me the chance to buy more and it's on the cheap!"

Contrarians tend to build their positions in 'tranches'. It's almost expected that the market will move against them, so they build their allocation as the stock moves down.

Obviously there are hazards here. If he gets it wrong, then he's likely to lose a lot of money.

That's why these guys put in a tremendous amount of legwork. They understand their investments intimately. That gives them the conviction to place bets against the market.

And the flip side of that is that contrarians can't stand jumping aboard a crowded trade. That might mean they miss out on big moves but that's OK: they're waiting for their own big moves to come in.

Heads I win, tails you lose

You could be forgiven for thinking that contrarians have some sort of a death wish.

They refuse to get into trades that are clearly working. And they just love buying badly performing stocks, with the conviction that they will come good. That takes serious guts.

But there's a third, and rather tragic pitfall for the inexperienced contrarian.

If he's right and finds a winner, then he's likely to sell it before the handsome gains come his way.

Remember, the contrarian just can't stand crowds. So if he's right and his stock turns out to be a winner, then the stock gets popular. And so he dumps it.

Unlike the visionary investor who holds on to his stock too long, the contrarian is apt to sell too soon.

Too many investors try the contrarian approach and fail. They just don't have the qualities necessary for successful contrarian investing.

If you're going to climb Everest, then you'll have to put in the preparation first. But even that won't be enough if you don't have the fortitude for this incredibly tough style of investing.

But for the successful contrarian, the danger is dwarfed by the excitement and profits that come from getting it right.

Think about contrarian investing as a marathon, rather than a sprint. It can take a long time for the markets to come round to your way of thinking. In fact, the more right you are, the longer it'll take for the rest of the world to come round.

Meet the best contrarian investor I know

If you lean towards contrarian investing, you really need to meet Simon Caufield, the editor of the True Value newsletter.

He's probably the most successful contrarian investor I've met. Simon sold his management consultancy business back in 2007 to focus 100% on his investments. And boy, was he glad he did. As the financial crisis hit, Simon's contrarian approach meant that he made money, even as the markets fell apart.

This sort of investing takes time and effort. Nothing less than full commitment will do. And that's what Simon gives his closed group of readers.

Simon's contrarian investment style is unique. I think it has the capacity to see your portfolio through whatever the markets throw at us over the coming years.

This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.

He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.

Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.