Wise contrarians win out

published 16 May 2013

"What the wise man does in the beginning, the fool does in the end." That's how Howard Marks of Oaktree Capital began his talk at the 2013 Value Investor Conference last week. He explained what he sees as being the three stages of a bull market.

The first happens when a few people begin to believe that things will get better. The second comes when most investors realise that improvement is actually underway, and the third when everyone is sure that "things will get better forever".

This last one think the second quarter of 2007 is characterised by the "extreme brevity of financial memory" and so by the same silly justifications over and over again. "This time it is different" people say, usually just before they point you to an investment that "is so good that the price doesn't matter" when in fact, all that matters is the price.

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The key to success is getting in during the first stage and out during the last. How? As ever, it is simple, but not remotely easy. If you want to prevent yourself being the fool, you have no choice but to be consistently contrarian, to build "uncomfortably idiosyncratic portfolios" and, as Mark Twain said, to remember that "whenever you find yourself on the side of the majority, it is time to reform".

So where are we now? With markets knocking around all-time nominal highs, is it time to reform? Not yet, says Marks. The "existence of improvement is generally accepted", but is neither particularly widespread or overdone. He reckons we are in stage two "somewhere in the middle".

Marks has a similar set of three stages for bear markets. The first stage comes when just a few investors recognise that, despite the prevailing bullishness, things won't always be rosy. The second comes when most investors realise things are deteriorating, and the third when "everyone's convinced that things can only get worse" (as in early 2009).

I was thinking about this as I looked at the numbers out from the housing market this week. We saw stage one of a property bear market post-2007. And it felt like we entered stage two as well. But look at the data and you'll see stage three never quite arrived.

The latest RICS residential market survey shows that surveyors as a whole feel happier about prices and sales. The Council of Mortgage Lenders tells us that the number of first-time buyers jumped by 20% in March. And Land Registry data show prices across Britain rose 5.5% year-on-year in the first quarter of 2013.

So is it all over? Are we back to somewhere in the middle for the housing market too? We'd like to think so (we are mostly reluctant homeowners at MoneyWeek), but history doesn't offer many examples of bear markets that skip the bit where asset prices actually hit fair value on the way down. So despite the happy numbers and the wall of government-sponsored money being chucked into housing, we aren't yet convinced.

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.