The Art of Contrarianism
There is a massive difference between average and actual returns on invested capital. The impact of losses destroys the annualized ‘compounding’ effect of money.” Throughout history, bull market cycles are only one-half of the “full market cycle.” That is because, during every “bull market cycle,” the markets and economy build up excesses that are then “reversed” during the following “bear market.” The problem with being “bullish all the time” is that when you are eventually wrong, it comes at the worst possible cost: the destruction of investment capital. However, being “bearish all the time” also has a price, such as failing to grow investment capital to reach financial goals. While some investors left the market to avoid a 50% crash in 2008, they never returned for the subsequent 500% return. What was worse? While the “bulls” seem to have their way during rising markets, the always-bullish media overlooks a problem. Over the past 120 years, the market has indeed risen. However, 85% of that time was spent making up previous losses, and only 15% making new highs. The importance of this point should not be overlooked. Most investors’ “time horizon” only covers one market cycle. Suppose you are starting at or near all-time highs. In that case, there is a relatively significant possibility you may wind up spending a significant chunk of your time horizon “getting back to even.” The biggest problem for investors is the emotional biases by being either “bullish” or “bearish.” Effectively, when individuals pick a side, they become oblivious to the risks. One of the most significant factors is “confirmation bias,” where individuals seek confirmation and ignore non-confirming data. As investors, we should be open to all the data, weigh incoming data accordingly, and assess the risk inherent in our portfolios. That risk assessment should be an open analysis of our current positioning relative to the market environment. As a portfolio manager, I invest money in a way that creates short-term returns but reduces the possibility of catastrophic losses that wipe out years of growth. We believe you should not be “bullish” or “bearish.” While being “right” during the first half of the cycle is essential, it is far more critical not to be “wrong” during the second half. Resisting – and thereby achieving success as a contrarian – isn’t easy. Things combine to make it difficult; including natural herd tendencies and the pain imposed by being out of step for a while. The problem with being a contrarian is determining where you are during a market cycle. The collective wisdom of market participants is generally “right” during the middle of a market advance but “wrong” at market peaks and troughs. As an individual, you can avoid the “herd mentality” of paying increasingly higher prices without sound reasoning. Avoid “confirmation bias.” Develop a sound long-term investment strategy that includes “risk management” protocols. Diversify your portfolio allocation model to include “safer assets.” Control your “greed” and resist the temptation to “get rich quick” in speculative investments. Resist getting caught up in “what could have been” or “anchoring” to a past value. Such leads to emotional mistakes. Realize that price inflation does not last forever. The larger the deviation from the mean, the greater the eventual reversion. Invest accordingly. Being a contrarian does not mean always going against the grain regardless of market dynamics. However, it does mean that when “everyone agrees,” it is often better to look at what “the crowd” may be overlooking.
