What Seinfeld teaches you about contrarian investing
Going against your instincts can be a profitable investment strategy as Seinfeld showed, says Matthew Partridge.
Seinfeld was a popular 1990s US television series created by Larry David and Jerry Seinfeld. Famously described as a "show about nothing", it follows the everyday life of stand-up comedian Jerry Seinfeld and three of his friends: former girlfriend Elaine Benes (Julia Louis-Dreyfus), eccentric neighbour Cosmo Kramer (Michael Richards) and George Costanza (Jason Alexander). Seinfeld is regarded as one of the best TV series of all time and has won ten Emmy Awards and three Golden Globes.
The key moment
In an episode called "the Opposite", George Costanza, unemployed, single and living with his parents, is disgusted with his life. Reasoning that since every decision he's made has turned out to be disastrous, he starts doing the opposite of what his instincts tell him, ordering a different meal for lunch, approaching a woman in a restaurant and then being frank with her about his poor prospects. Amazingly, this works: he gets the girl as well as a dream job with the New York Yankees.
Lessons for investors
George Costanza's strategy of doing the opposite is similar to an investment strategy called contrarian investing. This involves gauging the direction of market sentiment and then investing the opposite way when it hits an extreme.
So when everybody is extremely bullish (or positive) about the market, contrarian investors are likely to dump shares, anticipating a market top, but when everyone is panicking, they tend to buy in the hope of a rebound. Indeed, the very best are flexible enough to go against the market when it hits one extreme, and then reverse their position when it swings too far in the other direction.
Other financial wisdom
Technically, Costanza isn't a pure contrarian because he is only going against his own instincts, rather than against those of the wider market. However, it's not a bad idea occasionally to examine the rationale behind your choices in order to check that they are based on fundamental analysis.
It is all too easy to get swept up by the herd or wrapped up in a theory. As Keynes famously noted, notions that sound like common sense may turn out to be anything but. "Practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist."