WHAT IS THE MEANING OF CONTRARIAN INVESTING?
·
Some characteristics
of a Contrarian investment in our view,
·
Stocks/sector not
performing or even making lows.
·
Company’s stock out of
favour due to transient reasons or for no reason at all
·
Company’s stock out of
favour due to short term events or one-off event tampering companies financials
and business.
·
It may be a stock from
a sector that is performing well or even outperforming the market.
·
The stocks are usually
undervalued in one or the other ways.
·
Some companies may
have no profitability at all and incurring losses on books.
·
Contrarian investing
opportunity also arises due to resumance and end of bull markets and bear
market cycles which create discrepancies in valuations.
·
Portfolio reshuffling
and rebalancing of big and institutional investors also tend to create
contrarian investment opportunity.
·
They are in sum buying
stocks that are performing poorly or not so well as they should be (in your
view) and selling when they perform .
·
In our view, a true
contrarian investing also takes features from true value investing principles.
·
Also that contrarian
investing in not just about buying or being bullish like a ‘contrarian
investor’ but also selling or being bearish like one.
·
Such other reasons.
OUR APPROACH has been like ‘not to going
against the market’, but ‘going against the market’s ignorance’. We also don’t believe
that buying in bad days (market correction or a bear phase) of markets is
contrarian investing (as it is much popularized as meaning of contrarian
investing) but instead buying in bad days of the sector/stock is.
CONTRARIAN INVESTING Success Stories:
According to our study, in general Contrarian
investing has always succeeded if employed while keeping in mind principles of
value investing and prudence.
We all know the biggest investor of all time
Warren Buffett and many other iconic investors world over have praised
contrarian investing and as well proved that this approach works to make big
returns out of the markets.
Below is some of the stories taken from site
investopedia, Contrarian investors have historically made their best
investments during times of market turmoil. In the crash of 1987, the Dow
dropped 22% in one day in the U.S. In the 1973-74 bear market, the market lost
45% in about 22 months. The September 11, 2001, attacks also resulted in a
market drop. The list goes on and on, but those are times when contrarians
found their best investments.
The 1973-74 bear market gave Warren Buffett
the opportunity to purchase a stake in the Washington Post Company (NYSE:) - an
investment that has subsequently increased by more than 100-times the purchase
price - that's before dividends are included. At the time, Buffett said he was
buying shares in the company at a deep discount, as evidenced by the fact that
the company could have "… sold the (Post's) assets to any one of 10 buyers
for not less than $400 million, probably appreciably more." Meanwhile, the
Washington Post Company had only an $80 million market cap at the time.
After the September 11 terrorist attacks, the
world stopped flying for awhile. Suppose that at this time, you had made an
investment in Boeing (NYSE:BA), one of the world's largest builders of
commercial aircraft. Boeing's stock didn't bottom until about a year after
September 11, but from there, it rose more than four-times in value over the
next five years. Clearly, although September 11th soured market sentiment about
the airline industry for quite some time, those who did their research and were
willing to bet that Boeing would survive were well rewarded.
Also during that time, Marty Whitman, manager
of the Third Avenue Value Fund, purchased bonds of K-Mart both before and after
it filed for bankruptcy protection in 2002. He only paid about 20 cents on the
dollar for the bonds. Even though for awhile it looked like the company would
shut its doors for good, Whitman was vindicated when the company emerged from
bankruptcy and his bonds were exchanged for stock in the new K-Mart. The shares
jumped much higher in the years following the reorganization before being taken
over by Sears (Nasdaq:), with a nice profit for Whitman. Thanks to moves like
this, the Third Avenue Value Fund has earned a market-beating 14.3% return
since Whitman founded the fund in 1990.
Sir John Templeton ran the Templeton Growth
Fund from 1954 to 1992, when he sold it. Each $10,000 invested in the fund's
Class A shares in 1954 would have grown to $2 million by 1992, with dividends
reinvested, or an annualized return of about 14.5%. Templeton pioneered
international investing. He was also a serious contrarian investor, buying into
countries and companies when, according to his principle, they hit the
"point of maximum pessimism." As an example of this strategy,
Templeton bought shares of every public European company at the outset of World
War II in 1939, including many that were in bankruptcy. He did this with borrowed
money to boot. After four years, he sold the shares for a very large profit.
……These are just a few examples
only…Contrarian investing Approach has worked more times than it has failed.
PITFALLS/MISTAKES OF CONTRARIAN INVESTING:
So many times due to misunderstanding the
heart of the meaning of contrarian investing as mentioned in the meaning
section; many investors mistake simply buying underperforming stocks and
sectors and think they are contrarian investors.
Another pitfall is that you have to be bold,
strong hearted and patient if you want to become a contrarian investor and reap
the benefits of it too.
Many people lose their nerves when their
portfolio goes down. This is a big draw back of such type of investing mantra.
You have to bear looking like a fool for a short period of time to reap huge
benefits of being a contrarian investor.
One another reality is about mutual funds. We
have been told about few so called contra-schemes from mutual funds. In reality
no mutual fund is truly contrarian. They can not be.