THE CONTRARIAN INVESTOR

(Source:India Wealth Report 2013)

(* These are not the latest figures but there is a very slim chance that there will be any change, since markets have moved only in the last three months, if one were to wait for the latest figures then one is waiting for certainties and the stock market runs on probabilities)

Within the ‘Financial Assets’ the break up is as follows :

It is clear from the above that within the ‘Financial Assets’ sub class the ratio of debt to equity is disproportionately high, but I am not surprised. Please note that I am not even looking at the ‘Physical Assets’ (Gold and Real Estate). It means that even if investors hold on to their physical assets and just do a simple reallocation from debt to equity they will be able to participate in this rally. The above clearly shows that the willingness to take an investment risk  is still low and that is all the information a contrarian investor needs, nothing else. In such a market the contrarian investor should be thinking about the next five years when the consensus is thinking about the next five days / months. I think most investors are waiting for a normal market or one which is devoid of euphoria and are effectively waiting for sanity to return. History shows us that there is no such thing as a normal market, more often than not,  markets are irrational and abnormal . In today’s scenario is any one investing at all? To the best of my knowledge people are still shuffling their portfolios and selling X to buy Y. This is not investing, it is switching within the same asset class. I often ask investors how much of their money is allocated to equities? I find that most people have a very negligible part of their money invested in stocks. I find that most investors are carrying a lot of baggage from yesteryear’s and are just waiting to press the eject button on their portfolios. I am not trying to say that people are not investing, they are, but most are just shuffling their portfolios and are still too scared to invest. In short, the contrarian approach today would be to allocate money exclusively to the equity market and not to debt.

We are still in a scenario where the majority of the investors mistrust this rally. I am sure they all have good reasons for the mistrust but it might still be a good idea to put some money away into stocks by way of a diversification. The ironical part is that all of us may think that we are trading against the herd, actually we are not. This leads to a situation where everybody thinks that he is a contrarian investor. At any given point in time, the number of persons claiming to be contrarian far out number the actual number of contrarians. Also the number of people who say that they are waiting for a correction far out numbers the number of people who will actually buy when the inevitable correction does occur.  By being a contrarian, what one is actually trying is to beat the ‘group-think’. We are all part of and vulnerable to ‘group-think’, which means that we trade according to the consensus. If we do not trade along with the consensus we feel left out. We are wired to follow the crowd. A contrarian investing theme means trying to invest in a manner that differs from the consensus. Investing in todays day and age is a complex process, there are just too many variables. Think about it, the average investor is wrestling with global macros, asset allocations, information, analysis, sectors, companies and his own emotions. The successful investor has to be good at all this and more, since he still has to time his buy and sell decisions. That is expecting a bit too much of any person and explains why most investors follow the crowd (since it is so damn difficult to arrive at a decision on our own). After one has decided to invest the second part of managing ones own emotions is still left to be conquered. While speaking to investors I find that most are still afraid of investing money in the market because of past experiences of “buying high and selling low”. (This generally happens when one is following the crowd.)

CONCLUSION

In my experience the people who bought stocks in 2008  can be called contrarian investors. I know that the majority of us did not do that (me included). So since it is very difficult to adopt a contrarian stance in our investment process how can an investor achieve this? Anyone who wants to be a contrarian has to plan his contrarianism ahead of time and he has to follow a plan without letting his emotions get the better of him. He can do this by using the table below (which suggests how much money one plans to invest when the market falls by a certain amount). This strategy effectively brings about a ‘contrarian bent’ into the investment process. What I am effectively proposing is a method to take the emotions out of the decision-making process. If readers can make their investing less emotional their investment objectives will be easier to achieve. The investor has only got to make a decision as regards his fund allocation towards equity and the rest can be automated by investing on every dip as follows:

The amount invested at the lower levels should be higher to ensure that the benefits of cost averaging are obtained. The levels and percentages suggested above are only indicative, each individual investor will have to fine tune it to his own needs and requirements. If the above method or any tailor-made variation is followed it  will effectively ensure that one is a contrarian investor.