"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well." Warren Buffett
Being a contrarian can be a lonely lot in life. By definition, being a contrarian means that you are in the minority, breaking free from the herd mentality. The implication is that you make decisions that most of the world thinks are ill-advised. And vice-versa. Being a contrarian isn't for the weak-willed who need to get validation from the acceptance of other people.
Sometimes the herd mentality works well; buffalo coming together to defend against a wolf pack, for instance. On the other hand, sometimes the herd mentality is not profitable. Buffalo stampeding over a cliff to their deaths, for instance. In fact, prior to the domestication of horses, exploiting the herd instinct was how people used to hunt. It's so easy to just follow the crowd though. As an example, right now one of the things that the investment crowd likes is gold. Not surprising, gold is trading at record high prices. The price of gold has quadrupled in the last decade.
Is the crowd going to stampede off a cliff? The last time gold appreciated like this it eventually lost 60% of its value, and took a generation for prices to recover.
Larry Sarbit is a Canadian investment fund manager who has never cared much for what the crowd is doing, except perhaps as a contrarian indicator in order for him to consider doing the opposite.
Mr. Sarbit recently wrote an article about taking advantage of the gloomy US equity markets. He believes that the time to buy American equities is now; that the sale won't last forever.
But he's found that there isn't much of an audience for that message. As he travels the country what he is hearing time and again is that investors don't want to buy anything in the US - period.
People are more receptive to investment ideas like buying gold, after it's already quadrupled in price in the span of a decade, than they are to buying some of the best companies in the world at cheap prices.
Sarbit says, "Before we relegate America to the trash heap of other fallen economic and military empires, remember that they have been through worse. It will undoubtedly take time and cost to get over the current mess. But America is a vibrant nation, composed of an entrepreneurial, adaptable people who don't easily accept being second rate."
Sarbit says, "As usual, people mistakenly conclude that what has happened in the past is indicative of what the future will look like. In my opinion, there currently exists an exceptional opportunity for investors to pick up some real bargains in the U.S. equity markets. When economic conditions are this dismal, at some point, the environment will begin to turn positive and a lot of money will be made. But remember: The opportunity won't last forever."
Investment industry veteran Dan Hallett had this to say about Sarbit's article: "The lesson: the most attractive investment opportunities are often those that make you squirm. Just about everybody cringes at the thought of buying American companies. Yet, there remain many bargains in the vast pool of multi-national businesses."
Hallett says, "If you want to repeat the return-detracting behaviour that so many investors have exhibited in the past, just take your 'buy' ideas from the top performing asset classes of the most recent 5 and 10 years. Going against the crowd, however, will require you to unglue your mind from simply projecting the recent past into perpetuity. But as the saying goes, this is easier said than done."
Sarbit isn't the first person to write a "Buy American" piece. In October 2008, just a few months before the markets bottomed out, legendary investor Warren Buffett wrote, "The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary."
"So ... I've been buying American stocks."
"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation's many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now."
Being a contrarian can mean buying investments that make you squirm. But that's better than being part of the herd stampeding over a cliff.
The opinions expressed are those of Brad Brain, CFP, R.F.P. CLU, CH.F.C., FCSI. Brad Brain is a Certified Financial Planner with Manulife Securities Incorporated, Member CIPF and with Manulife Securities Insurance Agency in Fort St John, BC. Brad Brain can be reached at brad.brain@manulifesecurities.ca or www.bradbrainfinancial.com.
