In investing, some of the biggest payoffs regularly come from doing the opposite of the crowd.
This is called “contrarian investing,” which I have personally learned about in conversations with some of the greats at this style over the years, like David Dreman, Marty Whitman, Irving Kahn and Seth Glickenhaus.
Contrarian investing isn’t for everyone.
For long periods of time you will be alone and you will feel wrong. It’s not a style of investing for people who need regular external confirmation of their views.
But the rewards are big when your contrarian bets pay off nicely because the crowd finally comes around to your view, and you can sell your stocks to them at a tidy profit.
This is why I’ve finely tuned my stock selection system to pick up contrarian signals in the market, via components like relative value and relative performance measures, analysis of ownership trends, analysis of financial strength, and technical analysis, among others.
Here’s a good case in point.
For much of the early part of this year, my system was picking up a pretty good contrarian signal in energy names. And earlier this year, the crowd was really warming up to biotech a little too much, in my view, a sector I had been suggesting names in since 2010 before the crowd came along.
So on February 28, 2014, I suggested to Brush Up on Stocks subscribers that they lighten up on trading positions in biotech, and go long ten energy names, both contrarian calls. I also suggested more energy names in subsequent issues.
As you can see, these contrarian suggestions have paid off nicely. Here are the results, as of mid day today, June 17, 2014.
February 28, 2014 issue of Brush Up on Stocks:
* Four new energy names I suggested are up 12%.
* Six names I reiterated are up 16.3%.
* The market (SPY) is up 5.6%.
* Biotech stocks (IBB), which I suggested lightening up on, are down 6% (though they have been down much more than this, since February 28).
March 31 issue of Brush Up on Stocks:
* An energy name I suggested is up 6.5% compared to 3.3% for the market (SPY).
April 11 issue of Brush Up on Stocks:
* Eight energy names I reiterated are up 13.4% compared to 6.3% for the market (SPY).
April 19 issue of Brush Up on Stocks:
* A new energy name I suggested in this issue is up 17.5% compared to 4% for the market (SPY).
May 8 issue of Brush Up on Stocks:
* An energy name I reiterated is up 15% compared to 3% for the market (SPY).
Of course, I didn’t know at the time that I suggested all of these energy names that an al Qaeda splinter group would take over several cities in Iraq and put a bid under the price of oil. Like a lot of people, I had some idea that the political instability in Iraq would create a spike in oil, and I had even written about that.
But predicting the timing on this kind of event is nearly impossible.
The key takeaway in that: With contrarian investing, you have to be prepared to be patient and wait it out. Since it is tough to predict the future, you don’t really know when a catalyst will come along to help you, or when the crowd will come to its senses and help you out.
But more often than not, that’s how it plays out, sooner or later. And you wind up with a market-outperforming bet, which is the whole point of investing.
The question is: Will you have the psychological strength to stick it out, in the meantime? Not everyone does.
As for energy stocks now, I was personally lightening up on trading positions today, but maintaining long-term (multiyear) core holdings, and I think that is a wise thing to do at this point.