The movie Glengary Glen Ross has a famous scene with Alex Baldwin saying: “A, Always; B, Be; C, Closing. Always Be Closing.” That is his formula for success in sales. I submit that in the stock market and the world of investing, the phrase should be: “A, Always; B, Be; C, Contrarian. Always Be Contrarian.” In other words, to be successful in investing, always do the opposite as everyone else.
Last year, that would have meant three major things: (1) buy oil and energy stocks, (2) buy travel stocks like airlines, and cruise lines, and (3) buy entertainment stocks like cinemas, film companies, and destination companies. One year later, all of these stocks are up significantly off of their lows.
Virtually no analysts, no major hedge, and no major mutual fund were touting these stocks at their lows. No one was pounding the table, saying they were cheap and would turn around. Last year everyone was selling these shares. I have a general rule that if Jim Cramer says Sell, Sell, Sell, I look at when I should start buying.
Here is an article in CNBC where he is mimicks Warren Buffett, who sold right at the bottom. Warren Buffett, as I pointed out in my previous article, “Has Warren Buffett Lost His Groove,” sold his airline stocks right at the bottom.
The forces against being a contrarian are very powerful. Even Buffett couldn’t escape the centrifugal force of following the crowd. Even now, he won’t admit this was a mistake. His most recent shareholder letter at Berkshire Hathawaycompletely ignores his panic selling last May.
So, what can you do to identify how to be a true contrarian. Here are three methods that I have found useful in the past.
Always Act During Market Extremes
When markets break down, or up you should be looking to either buy or sell. In the first case, many analysts, TV pundits, and market professionals will generally tell you why the market is going down.
“Interest rates are rising, multiples are falling, or valuations are extended, they say. That means the market needs to cool down, and stocks should be lower. Better to wait this out before buying.”
That was typical advice all during last spring and summer. Recently it has been similar. “The market has moved up too high. Tech stocks are too expensive. Look elsewhere or wait until interest rates stop rising.”
Look to buy the most extreme asset class taking a hit during that period. I suspect soon it will be something like commercial real estate or financial assets. The key is to try and identify the most despised asset class. Then buy it.
This has been one of the most fundamental reasons why some of the Reddit stocks like GameStop, AMC Entertainment, etc., have jumped. There were too many lemmings on the short side of the trade.
Don’t Expect Contrarian Purchases To Make Sense
I write a lot of articles about stocks. One of the most despised stocks last year that I completely missed was Nio (NYSE: NIO). I remember writing one article over a year ago stating in no uncertain terms that Nio stock was worthless and the company was likely to go out of business. I was the market. I was following the crowd.
What I could not understand and foretell was that China was not going to let one of their premier electric vehicle companies go under. The stock fell to below $1.00 per share. But then suddenly, the company was rescued by a governmental entity.
It took me a while to realize that Nio would survive and could raise even more capital. At first, in March 2020, when the stock was below $3.00, I suggested the company could survive, but I did not recommend it. By the time I changed my attitude in late August, Nio stock was almost at $20.00.
In other words, I was too rational. I should have put myself in the seat of the CEO and the board. They were determined to survive. I should have followed my contrarian impulses more fully. Sometimes that does not mean all questions are answered. Today the stock is at $39 and change and has been as high as $62.84. In fact, now might be another chance to look at the stock again.
Keep Your Powder Dry
Warren Buffett wrote in his 1987 annual report that, “If you want to shoot rare, fast-moving elephants, always carry a loaded gun.” What he meant is always have cash or liquidity to be able to make large investments at major contrarian points.
Invariably, that means you have to sell all or a portion of your winners at their peak, or close to their peak. You have to eat the taxes. You have to have enough money to buy more of an investment you like assuming it will be cheaper. This means you have to have a stream of income or the discipline necessary to buy when everyone else is selling. It might even mean borrowing money to make purchases at the bottom.
On Oct. 19, 1987, the market sold off 23% in one day. This was completely irrational. There was no fundamental reason. The value of corporate America had not dropped that much. I was a portfolio manager for a large insurance company at the time. I managed international equities. I was actually in Malaysia at the time. I went into a meeting there and immediately was asked by the company I was visiting what was going on. I told them exactly what I just said. Nothing had changed in corporate America. We started buying more stocks and by the end of the year, we had a positive return.
The best way to be successful in the market is to act the exact opposite of others. Typically, this will mean you will have losses at first. I first started buying oil stocks last year in mid-spring and early summer. They kept falling. It wasn’t until the fall that I started having profits.
Often your purchases won’t make much financial sense. In the Depression of the 1930s, Sir John Templeton bought 100 of every share on the NYSE, selling below $1.00. There were 104 of these companies, and 34 of them were in bankruptcy. All but four of the stocks rebounded, making nearly a 400 percent return in just four years. He borrowed a good deal of money to do this. It became a huge source of wealth for his family.
That story illustrates all three points about contrarian investing. He did the opposite of others. His purchases did not make much sense at first. He borrowed the money to have the power to make the purchases.
When it comes to so-called “oracle” investors of today, like Warren Buffett, do as they say, not as they do. He has become a fair-weather investor. When tested, he falters. Better to be more like Templeton and other true contrarians. Always Be Contrarian.