In Defense Of Contrarian and Value Investing

"I believe the very best money is to be made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all the money by catching the trends in the middle. Well, for twelve years, I have often been missing the meat in the middle, but I have caught a lot of bottoms and tops"
-Legendary investor and trader Paul Tudor Jones II in Market Wizards.
This past year has been a trend followers dream. While the market has gone up and down it has done so in well defined trends. The blogosphere is full of Monday Morning Quaterbacking lauding anybody dumb enough not to see that it does not pay to fight the trend. I believe that being a contrarian and a value investor are not only valid but the most rewarding strategies if done properly. The reason I group value investing and contrarian investing together is that generally when a stock becomes a value it is because the stock is out of favor.

Warren Buffett, is probably the most famous of contrarians and value investors. He famously averaged into Geico all the way down, in what was probably his best trade ever. John Paulson's, Greatest Trade Ever, was an out of consensus, contrarian call. Had he cut his losses when the trade initially went against him nobody would even recognize his name.

Michael Steinhardt, has the best long term track record of any hedge fund manager and he is a famous contrarian. When an analyst would come to him with a stock idea he would famously ask, "what do you know that the market does not know"? David Einhorn famously fought Allied Capital even as the position went against him and continues to fight the market until this day. Other famous investors who are happy to buy assets when they become cheaper and fight the trend include Seth Klarman, John Templeton and Jean Marie Evillard.

I can go on and on naming famous contrarian investors. It is the single quality that appears most often when looking at the most successful investors in history. Maybe being a successful contrarian is a more difficult skill to hone and most should stick to something simpler. But it can and has been done.


Anonymous said...

I agree, but buffett and jones have deep pockets. the reward is much better at the turns, but the short term risk is also enormous. I remember jim rogers was short homebuilders in 2005. Eventually it worked, but he was down 30-50% in many of his positions before the turn. If you short high or buy low with infinite ammunition and time frame, you probably never lose.

Anonymous said...

Short BRN @ 8.65


revelo said...

"Buy stocks like you buy groceries" recommended Benjamin Graham. That is, rejoice and stock up when everything goes on sale. Feel depressed and avoid buying or sell when prices get jacked up. Really quite simple.

The problem is that in order to know whether stocks or other assets are on sale or not, you have to read the financial news. But the financial news is saturated with the opposite of Graham's thinking. That is, the financial news contains the subliminal message that high prices are a cause for rejoicing and low prices for being depressed. It is extremely difficult to read the financial news and not be subconsciously influenced by this subliminal message.

Anonymous said...

Nice post revelo. I like that.