How contrarians combine value and momentum to take positions opposite what the consensus believes. What is the consensus view in today’s financial markets and how are contrarians positioned.
Topics covered include:
- Five attributes of successful investors
- Why does the consensus expect stagflation
- How central banks have performed in previous tightening cycles
- Three reasons central banks tightening results in a recession
- When have interest rates peaked in prior tightening cycles
- How stocks tend to do well when investors get extremely pessimistic
- What are examples of contrarian investments in the current market environment
- How contrarian opportunities involve both value and momentum
- What are some additional examples of being contrarian outside of the investment arena
Show Notes
Weekly Market Pulse: Time To Get Contrarian? by Joseph Y. Calhoun III—Alhambra Investment
BofA Says Fund Managers Most Gloomy on Record on Recession Woes by Nikos Chrysoloras—Bloomberg
Tightening risks recession but inaction would be worse by Neil Shearing—Capital Economics
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Transcript
Welcome to Money For the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today’s episode, 383. It’s titled “How to be a successful contrarian.”
Right after I graduated with a Bachelor of Business Administration in Finance from the University of Cincinnati, I decided I should go get a job. I interviewed with Schaefer Investment Research. They are an options newsletter and service that’s been in business over 40 years. In the interview, I was asked “What does it mean to be contrarian from an investment standpoint?” I didn’t know. I stumbled around. I came up with something plausible. We hadn’t covered contrarianism in my undergraduate program. I didn’t get the job. I lacked experience. I lacked the vocabulary of investing.
An Investment Philosophy
I thought about this recently because I found an old Moleskine notebook that I began back in 2004. I used to carry this small notebook around with me; I would take notes as I flew many miles to various client meetings. One of the pages I found described my investment philosophy, or as I tried to outline the investment philosophy of our investment firm. I probably wrote this back in 2006.
I wrote that two decades of portfolio management had taught us to be skeptical. That despite slick marketing brochures, that most asset managers were unskilled. We met with over 700 managers per year, and only a few were on our recommended list. Asset managers are very good marketers; it’s a high margin business. They can hire the best salespeople in the world, that understand human psychology.
I used to love to sit in manager search meetings where a new potential investment manager would present to one of my clients’ investment committees—a university endowment investment committee—and just observe how these very skilled marketers present it. But I realized at the end of the day marketing doesn’t lead to investment success.
It might lead to more clients, and as a result, we were very skeptical when it came to the asset management business. I wrote that we were also contrarian. Successful investing means ignoring the crowd, I jotted down, bucking the trend, and focusing on what’s out of favor.
Joe Calhoun is president of Alhambra Investments. This is an SEC registered investment advisor; he’s been in business since 2006. Joe developed Alhambra’s All Weather Multi Asset Class portfolios. I had never invested with Alhambra, but as I was reading their blog, he discussed what it means to be contrarian, to invest against the consensus. He wrote:
“To generate better than average returns, your portfolio must diverge from the norm, but only when the norm reaches such an irrational state that normally rational people start to think that the irrational is actually quite rational. The perfect contrarian opportunity is one where you are the last rational person in an irrational world. Which is, of course, quite irrational.”
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