Contrarian Investment Philosophy

One of the most effective investment techniques I have observed in my several decades in the investment and financial business, is referred to as "being a contrarian." Contrarians act in "outside the box" ways, interpreting seemingly bad news with a different point of view than conventional investors.

The Free Merriam-Webster online dictionary describes a "contrarian" as "a person who takes a contrary position or attitude; specifically: an investor who buys shares of stocks while most others are selling, and sells when others are buying." Many years ago, I was privileged to have a client who was the definitive "contrarian." He felt that there were terrific opportunities to succeed in investing if you use contrarian philosophy. He demonstrated this to me in the 1970's when Washington Power was experiencing financial difficulties, and many individuals were selling off the stocks and bonds of the utility feverishly, anticipating that bankruptcy was nearing, and action was needed. My client, however, felt that the government could not afford to let the utility go under, and that even if the stock "tanked," he felt the bonds would have to be protected. Obviously, most investors disagreed, because the bonds were selling in the mid twenties (i.e. selling at only about twenty percent of their par value). He felt that the utility would either eliminate or defer interest payments, and that would cause even more panic for many investors. However, as he said, he wasn't looking for the bonds to pay interest/ dividends, nor was he hoping that the bonds would be restored to anywhere near par value, especially in the short-term.

His view and outlook was for what he described as the intermediate term (three to five years), and for the bond's price to move into the fifties. Sure enough, within the shorter end of his target area, the bond price was in the mid- fifties, typical investors were once again investing in the bond, and he had an easy time selling his bonds. Of course, he particularly enjoyed the fact that he had also doubled his investment in a relatively short period. During the more than a decade that I had a working relationship with him, I witnessed numerous other examples of his philosophy working effectively. However, there is one important caveat. Contrarian investing is not simply doing the opposite. It requires an analysis of the specific situation and evaluates the downside risk versus the upward potential.

I always found it interesting when certain individuals would ask me if the should hold onto a specific investment in their portfolio. I almost invariably answered the same way. " When you buy an investment, three things can occur. It can go up, stay steady, or go down. When you go to evaluate what you should do with a previous investment, don't evaluate it from the standpoint of what you originally paid. Simply think - if I were investing fresh money today, would I buy this investment. If the answer is yes, buy more. If the answer is maybe, keep some and sell some. If the answer is no, sell it all. It's that difficult, yet really that easy!"

When something becomes popular, whether a stock, bond or a commodity, should you buy? For example, we all hear about gold. A contrarian would probably not buy gold now because of the high price, preferring to buy when there is bad news. For example, a few years ago, when Tyco was immersed in controversy, many investors sold on the bad news. Contrarian style would be to evaluate the fundamentals of the company, and in this case, when the price dropped rather dramatically, purchased additional shares.

Contrarian investing is not for everyone. It is not for casual or lazy investors. However, for an individual who feels comfortable analyzing the "big picture," this philosophy can often be used quite effectively. I strongly recommend that before anyone invests, they fully understand all aspects, including potential risks and rewards, costs, and all ramifications. You should speak to a trusted financial adviser.