If you can wait and not be tired by waiting.”
While these are the opening lines of Rudyard Kipling’s poem- “If”, they are also some of the characteristics required as a Contrarian Investor. Contrarians by their very name go against the crowd and sometimes against the immediate momentum of the share price. That means that for relatively long periods of time, red can be a prominent colour on your P&L.
Business cycles and market inefficiencies can last for years, and it takes a strong stomach, high-degree of patience and tolerance to pain, plus a deep understanding of intrinsic value to continue buying when the news flow and sentiment are negative. Why would anyone wish to experience this?
It is because during these periods that one can potentially build decent positions at bargain prices and effectively aim to “beat the market”. In the Indian midcap space for much of 2013 till the 2014 General Election and again from 2018 till April 2020, the broad caps were generally in a bear market with nothing much to cheer about. Many of the experts and pundits sang along with the orchestra’s sombre notes.
However, as night becomes day, bear markets have a tendency to become bulls and it is those contrarians who have built up positions during the down periods who potentially create alpha.
It is not only during bear periods that a contrarian needs to take a stand, but also when there is froth in the market. The pendulum swings from fear to greed and it is easy for anyone to be caught up with the momentum, always hoping for more. The same people who shunned the market during the bearish period come in droves and abandon their sense of risk. This drives the price higher even though it is the same country and the same business.
However, being a contrarian on its own is not enough. One needs to couple this healthy sense of scepticism with a strong understanding of intrinsic value of the company, sector and long-term prospects of the country, if one is to avoid the value trap. Just ask those who dived into Lehmans, Blockbusters, Kodak and many of those companies that were once household names. It also creates conviction when self-doubt creeps in as the price can go against you for extended periods of time.
Being a Contrarian Investor is a lonely and at times painful occupation, but for those who get it right and stay true to the distance, it can be heavily rewarding.