The market analysis blog Jesse’s Café Americain put up a post last week talking about how contrarian investment strategies have been excessively relied on in recent times, arguing that people have begun to exclude common sense from their investing in the spirit of the strategy. Given the criticism, we thought it might be a good time to revisit the strategy.
Contrarian investing involves isolating an investment opportunity the market hasn’t seen value in yet, and putting your money in hopes of generating returns when the market gets up to speed. Sometimes it has to do with new opportunities emerging, and sometimes it’s based on basic gravitational laws (what goes up must come down…).
Contrarian investing can work well at times. Paskewitz Asset Management, FCI and HB Capital are all CTAs we track that use contrarian strategies, and they’ve been able to see some significant success while using them. In particular, Paskewitz has seen gains of 3.1% YTD [past performance is not necessarily indicative of future results].
However, sometimes markets won’t see value in a position for a reason. Under these circumstances, contrarian strategies can backfire, which Paskewitz learned the hard way from in early 2010, when they were down 12% in a one month period. Those times can be frustrating, but in our experience, those drawdowns are often the time you want to jump on board.
The bottom line is that contrarian investing, like any other strategy, can work well sometimes and not so well at others. At the end of the day, we find ourselves agreeing with Jesse on one point:
“God gave you a brain. Get to know it. It can be your best friend given time and circumstance. It seems to warn us when something looks dodgy, if we will but listen to it.”
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