There is a logic to being a contrarian investor. If few other people have bought into our positions before us, then we benefit more when we’re right. Equally, when we’re wrong the loss tends to be smaller if few other investors are also trying to exit the idea at the same time.
It’s easier said than done, of course. Lots of people agree with the concept of being contrarian, and so being truly different from other investors is a constant challenge. To help us, we incorporate other investors’ positioning into the structured process we use for evaluating our investment ideas. To bring that to life, I can outline two recent examples.
First, at the end of 2018 we conducted an extensive review of other investors’ views and then used the outcome of that exercise to identify the most hated asset classes and regions. Doing so gave us the confidence to remain positive on equities in the medium term and also to increase the credit exposure in some funds.
Taking a second example, in some cases other parts of an investment thesis are sufficiently strong to justify a trade despite us buying into a popular position. Lars recently blogged that we entered our negative view on Eurozone equities under such conditions. Even then, though, we look for ways to mitigate the risk around entering popular positions, such as by taking an offsetting position in equally unpopular assets like UK and Japanese equities.
I explained the importance of sentiment and the role it played in these two cases in a recent CNBC interview. The time we spent discussing it on air highlights how central it is to our decision making.
In early August, Tim Drayson outlined our darkening outlook for the US economy. But it’s not just the likelihood of recession that we think is rising; it’s also that the range of credible outcomes is widening, which reduces our conviction in our central case. With less confidence in our fundamental analysis and increasing uncertainty over when the current equity bull market will come to an end, sentiment is becoming an increasingly important factor in our decision making.
While we’re less confident about what will happen next, we can still take comfort in the benefits of taking contrarian positions and backing away from the investor herd.