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It’s not easy being contrarian. It never has been. Earlier civilisations treated Diogenes, Galileo, Columbus and their ilk with no more seriousness than nursery children do Quite Contrary Mary. Until, of course, their judgments proved correct. Modern day civilisations treat stoical, visionary and pioneering investors in much the same way, except that they call them sillier names: “Dr/Mr Doom” was the epithet bestowed on Marc Faber, the late Tony Dye and Nouriel Roubini at various points in their careers. Even after their judgments – on asset class booms and busts in the 1980s and 1990s – eventually proved correct.
That may be because, unlike their contrarian forebears, they were three bears. And the active investing public seems to regard “perma-bears” no more highly than an incompetent watch mender: only able to provide an accurate reading once or twice over a long period – not much use if you’re trying to time your entry into a market right now.
More contemporary contrarians have been accused of similar shortcomings. Peter Schiff, of US investment house Euro Pacific Capital, gave a series of interviews to CNBC and Fox News in 2006-07 warning of the imminent collapse of the US housing market, which, according to those who watched them, were frequently met with on-air guffaws. It is only recently that 1.5m people tuned back in to his broadcasts YouTube. James Montier, the behavioural finance contrarian in residence at Société Générale for some years, ended up defecting to the “dark side” – in the words of FT Money columnist David Stevenson – by joining the asset allocation committee of fund manager GMO. Right now, one of the few places where die-hard disciples, such as David, can listen to his warnings about equity valuations is via the FT Money podcast website (www.ft.com/moneyshow).
Why is this? Two obvious explanations spring to mind.
● 1. Conformity. According to social psychologists, the innate tendency to behave in the same way as others in a group is as difficult for investors to overcome as it is for anyone else. Academic studies in the 1930s found that: a) when people see a queue, they join it; and b) when people hear others’ estimates of a unknown value, they change their own. Queuing for items of unknown value became a staple of life in communist states – the ritual being celebrated in Vladimir Sorokin’s novel The Queue. Queuing to invest in a stocks and shares individual savings accounts (Isa) before the 1999-2000 tax year-end, here in the capitalist UK, was arguably not so different. Financial advisers are just as susceptible, admitted Robert Johnson, senior managing director at CFA Institute, in a recent FT article: “Implementing a strict value-based or contrarian investment philosophy can require exceptional fortitude, especially in volatile markets when it might be difficult to convince investors of its wisdom.”
● 2. Practicality. According to financial analysts – or, at least, their research notes – there must always be a stock to buy. “Buy” recommendations habitually outnumber “sell” recommendations – sometimes by a ratio as high as 8 to 1. Fund managers and private investors want something to buy, and generally have a preference for analysts’ inevitably “consensus” view on domestic markets. This, in spite of the observation oft repeated by the FT’s investment editor, John Authers, that “Best returns come to contrarians, with the best opportunities probably coming in emerging markets.”
Put these two factors together, and you have what we are witnessing now. Last week, stock market trading by small investors surged to levels last seen during the “dotcom” boom. Brokers said a “tide” of individual investors were turning to equities. It certainly takes a brave fish to swim against such a flow – especially when the FTSE 100 index has just recorded its highest-ever quarterly rise of 22 per cent.
So why be contrary – and how? There is one good reason, and one very good indicator. This week, the Investment Management Association released its latest Isa and fund statistics. August’s figures represented the highest net retail sales on record. Equity funds have gone from negative net retail sales of -£229m in January to positive net sales of £696m, and now make up 32 per cent of all funds bought. Corporate bond funds were the best-selling sector overall, for the 10th consecutive month.
Look back at sales in previous years, though, and it becomes easier to resist the tide. For 19 consecutive months to August 2007, specialist property funds were the best-selling sector. For the whole of 1999 and 2000, UK All Companies funds were the top sellers. Isa investors will remember what happened immediately after both of these periods.
Contrarians, however, will be more interested in the worst-selling sectors. Property funds were bottom of the list at the end of last year, and currently represent just 6 per cent of total net retail sales. So, if you’re going to join any queue right now, I’d suggest joining the shortest – even if you’re not a natural contrarian.
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