Feb 11

Invest Successfully by Being a Contrarian

Knowing things that other investors do not will set you apart from the pack of investors. This knowledge can also unlock immense wealth in the stock markets and even in other areas of investment. The easy way to receive this knowledge is to cheat. Having insider information is the sure bet to beat the markets – it’s also the sure bet to land you in the slammer. Fortunately for those of us who wish to live life on the straight and narrow there are other legal methods to gain insight into the future.

Learning to properly analyze a stock and a company will set you ahead of only those people that are not professionals. Any student of investing – whether formally trained or informally trained – will know at least as much as you do and the smartest guys will know more. One will argue that assumptions play a major role in the outcome of one’s analysis, but this is an argument that will continue indefinitely. Every analyst will come to a different conclusion – this is one point I would bet on.

Listening to the earnings release calls and reading annual reports are also well known and pretty much standard methods of gaining information on your company and therefore your stock. Again, every analyst will hear the exact same information as you hear it. Trading on publically available information is not going to cut it. I don’t care how fast you can get your order in after a merger breaks on CNBC; you aren’t going to get it in. Believe me I have done it and I have given up on trying. If news hits the wire, it’s too late to trade on it. You have to know what’s going to happen before it happens. You have to see the future. Sound possible? It is.

I prefer to shift holdings around based on what everyone else is doing. As everyone and their mothers were selling everything in 2008 and 2009, I was borrowing money to buy more. It made me sick every day, but I knew that there were stocks on sale and they would bottom out at some point. Being sick to your stomach is part of being a contrarian. When you flip through every single channel and hear about the pending end of the financial world and even your grandmother tells you its time to sell everything. When the four horsemen of the apocalypse are circling your brokerage account and all you want to do is take your remaining cash and curl up with it in the fetal position on your floor. It will make you slightly sick to your stomach to buy. As a contrarian, this is just part of the game.

Being a contrarian works both ways. John Paulson of Paulson & Co. famously shorted the mortgage backed securities (MBS) markets when everyone knew he was crazy. Essentially, Paulson bet that the U.S. housing market was in a bubble and it would burst – something unprecedented in U.S. history. The benefit of hindsight shows us how prophetic Paulson was. As people took out 100% plus mortgages on properties they could not afford, Paulson was a contrarian and bet the opposite.

I am sure Paulson was sick with every news story of the booming housing market hit the air, just as I was buying long positions in stocks that I had just heard were going bust along with the rest of the market. That’s just part of the fun. Spotting bubbles and acting with conviction takes foresight and a strong stomach, but this is a great way to beat the market. Buying stocks when the four horsemen of the apocalypse were the only guys whispering in my ear what a great choice I am making made me sick also, but two years later, those positions are up over 100%. Moral of the story is keep plenty of cash in your portfolio that you can use to buy more stock during a crash.

Pay attention to what “everyone” is doing. Be a contrarian. Make yourself some money!