Thursday, July 21, 2011

Everyone's A Contrarian


A few years ago I took my son Michael on college visit to the University of Virginia.

UVA is one of the top universities in the United States, and admission is highly selective and competitive. The school receives thousands of visits every year from high school students from around the world, and the crowd was large on the day of our visit.

When we visited Charlottesville,we heard a talk given by Parke Muth, one of the deans of admission at UVA.


It was an excellent talk, but what I remember most was the beginning of the presentation.

Mr. Muth looked out the audience of parents and top-flight students and asked:

"How many of you think the college admissions process is fair?"

Virtually no hands were raised.

So, with a smile, Mr. Muth said,

"Well, then, if you all think it's an unfair process, doesn't that really mean the process is fair? Doesn't really mean that you're all being treated the same way?"

The audience broke out in laughter.

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I'm competing against another firm for a new relationship.

My competition is a small money management outfit here in Boston whose whole investment approach seems to boil down to "we're contrarians".

In my opinion (remember I'm biased), "contrarian" is one of the most overused terms in investment management.

So many firms bill themselves as "contrarians" that being a contrarian is almost the majority. But how can you be contrarian if all of your thinking is mainstream?

Or, to echo Mr. Muth of UVA, if everyone thinks their thoughts and investments are away from the "herd", then by definition they really are part of the "crowd".

For example: my competition's website describes how, through their years of experience and education, they are able to find undiscovered gems in the investment world. However, the insights that they offer up largely seem to center around our broken political system, large amounts of debt, and apparent overvaluation of all markets.

Is this really contrarian thinking?

The problem with true contrarian thinking is that it often is at odds with making a living in the investment world.

For example, Jeremy Grantham - one of the most respected investment strategists in my business - was bearish on technology stocks starting in the mid-1990's. His work was eventually vindicated, but as he said, his firm (GMO) lost three-quarters of their assets under management in the late 1990's due to poor investment performance versus their benchmarks.

More recently, hedge fund managers like John Paulson and Michael Burry made literally billions of dollars betting against the US housing markets during the last decade (and were profiled in books like The Big Short). However, both men suffered huge amount of investor outflows from their firms before ultimately being vindicated.

As John Maynard Keynes said long ago, "Markets can stay irrational longer than you can stay solvent".

In my experience, everyone likes a contrarian - as long as it works out quickly.