The Making of… A Contrarian

My father, a role model in many things, especially ethical, used to say: “Maybe I’m a little stubborn [an understatement if there ever was one], but I prefer people like me”.

But, was my father a contrarian? I doubt it. He owned a small manufacturing plant and it can be dangerous to be contrarian when you run a cyclical business: a slip in timing and you easily are out. In fact, in business, unless you are a rare innovator, it is generally better to be nimble than early.

In investments, I’d say, it is almost the opposite.

Most investment managers who succeed in the long run are stubborn types as, indeed, are many successful industrialists. But, because crowd psychology, with its recurring excesses, is such an important component of stock or bond prices, a healthy dose of contrarian spirit is a big help, too.

As Warren Buffet wrote, "fear is the foe of the faddist, but the friend of the fundamentalist." As a rule, I believe, contrarian investors are likely to get better prices than faddists, who chase after trends. But more importantly, if they bought too early, contrarian fundamentalists usually will have the determination to add to their positions at lower prices.

Like most of the long-term investors who have survived many cycles, I am stubborn. But, unlike many of my co-believers in fundamental, value investing, I have been a contrarian for as long as I can remember. Where did this irritating habit come from?

Part of the answer struck me recently, as I was reading an article by Bill Gross, Managing Director of PIMCO, who parlayed the bull market in bonds of the last twenty-five years into both an excellent investment record and a stature as the bond market’s guru. Let me quote from his letter, “No Cuts, No Butts, No Coconuts”, posted on PIMCO’s web site on September 26, 2006:

“I must confess that there have been lots of times when I have cut in line: at the movie theater [etc.]…

Still, my biggest cut in line occurred on April 13^th 1944, the day I was born… That was the day that I [cut] in front of tens of millions of American boomers – boomers yet to be born, but nonetheless waiting in a demographic “line” that would stretch from 1946 to 1965, and produce the largest lump of kids, teenagers, twenty-somethings and ultimately graying adults that this country has ever experienced.

Being born several years in front of the first boomers has made life’s game a little easier to play for me than for them. What good fortune to have applied to college when there were fewer applications to review but the same amount of empty dorms; to have found a job before the competition got really intense; to have bought a home for $30,000 in 1971 before the boomers wanted theirs five years later… All my life I have been rather unconsciously cutting in line by purchasing stocks, mutual funds, and yes, bonds, just before my younger near-peers got the same idea.”

Born only months before Bill Gross, I too have carried with me the feeling of being lucky, often early and generally different. One aspect of that luck was that, not only were we born ahead of the Baby Boom tidal wave, but also after a very small generation of people born during either the depression or the rise of Nazism in Europe.

For us pre-baby-boomers, the competition was scarce and the opportunities aplenty. We had very few doubts about the future – particularly our future.

When I joined Tucker Anthony, in early 1969, I was 26. There were very few colleagues of my age, while most of the general partners were well into their fifties or older. These elders, full of accumulated experience and wisdom, were secure in their positions, and thus eager to share and to teach. At the same time, they were curious to learn from a new generation whose youth had been so different from theirs, thirty-odd years earlier.

My becoming a General Partner at age 29, the youngest in that old-line firm’s history, may have been deserved to a degree. But mostly, I now realize, it was demographic good fortune. In any case, despite my young age, I was not only allowed to freely express opinions and suggestions, but encouraged to do so.

I believe that the ease with which we progressed and the fact that our ideas were accepted so readily (if not always followed) made it easier for my generation to become contrarian. But, if there was any need (!), demography further reinforced our self-assurance.

As Bill Gross points out, we were always a few years ahead of the huge generation that was to follow us and whose tastes would shape the country’s consumption, spending, investing, saving, borrowing, etc. Simply by following our instincts, more often than not, we turned out being right – not because of better judgment, but simply because we were in front of the line.

In my case, a natural propensity to be contrarian was further compounded by the fact that, from the start of my American career at least, I have been an outsider.

Had I stayed in France, I probably would have turned out more conventional. I certainly had all the attributes: middle class family, traditional studies, a degree from one of France’s “elite schools”, etc. But, almost by chance (luck, really), I moved to the United States where, by being perceived primarily as a foreigner, I probably enjoyed more freedom than my American friends did, with their local baggage of spoken and unspoken social rules and rankings. Strangely, this freedom endured after I became an American myself, some years later.

Outsiders, even fully integrated ones, cannot help but look at things with a different historical and cultural frame of reference. They get used to having minority opinions.

In financial markets, where crowd psychology rules but is often at odds with common sense, seeing things as an outsider with a contrarian bias can be quite profitable.

* * * *

Unfortunately, in the last few years, life has become more challenging for contrarian investors. There are a number of reasons for this; some transitory, others more structural.

First, we now have a plethora of information. Not only through traditional newspapers, radio and television, but also through specialized cable programs, newsletters, internet blogs, financial websites and the likes, few news items get unreported and few pundits go unheard. We hear or read everything and the contrary of everything and it gets quite confusing. Usually, these new sources are enough to teach you that the information in your single, favorite newspaper or TV news program is wrong or, at least, misleading. But they are not enough (or too much) to tell you where the truth lies.

Second, all the news is reported instantaneously and immediately commented both ways – in a cheerful light and in a gloomy one. Not only has it become difficult to identify consensuses, but all time perspective is lost, as is the distinction between what is important and what is not.

Finally, being contrarian has itself become a fad of sorts. More and more market strategists and analysts claim to belong to this “school”; a number of newsletters, blogs and even mutual funds carry the term “contrarian” in their names; there are contrarian conferences and clubs. This sounds suspiciously like the formation of a “crowd of contrarians”. But isn’t the mission of the contrarian to think contrary to the crowds?

And it’s only going to get worse before it gets better, I’m afraid. You can already “Google” any subject for more information and opinions. Now, newer search engines such as “Google Trends” promise to measure how many people are interested in a given development and, probably, how many think it’s a good thing and how many think it’s a bad one. Possibly, the ratings will change several times a week or even a day.

Will an excess of information lead to total disinformation? I am not so pessimistic (though someone probably is: just check on Google). In time, we will learn to better use the tools that gather, filter and bring us the news and the data. And I believe we will be better informed for it.

The good fortune of contrarians is that financial markets remain, to a large and probably increasing extent, a mirror of crowd psychology. Market euphoria or panic can be measured by the behavior of financial asset prices themselves. It’s a good bet that no improvement in information or financial technology will prevent them from oscillating between extremes – as do human moods, especially within a crowd. We have had a few instances of euphoria and some of their bubbles have been burst while others are simply losing air.

Let’s remain cautious and wait with patience and anticipation for the next panic.

François Sicart (In Paris)
October 12, 2006