The Art Of Contrarian Investing

"The environment is what it is. We can’t demand a more favourable set of market conditions. But we can control our response, turning more defensive or aggressive depending on the climate.” - Howard Marks-Co-Chairman and Co-Founder, Oaktree Capital Management LLP. It is a piece of great learning from a great teacher. This powerful statement should set the stone for investors in every decision to be, be it shopping for stocks or investing in some footwear. Our experiences in the markets have made one thing clear – super stocks or super themes that dominate the bull markets don’t last until the next one.  

It’s easier to detect such excesses when you have seen a similar movie many times before. With that in mind, our focus is simple, to create a resilient portfolio that can weather uncertainty, change in leadership and subsequently be an engine of growth in the future. The only way by which investors can create such portfolios is to be contrarian. The difficulty lies not in the new ideas, but in escaping the old ones. Markets love the past. Brokers don’t run the market, storytellers do! Every bull market houses a new hero, a new idea, and a new theme.

To avoid such irrational behaviour, investors need to think independently. Be sceptical of anything that the markets fancy. Don’t ignore unpopular themes. More importantly, investors must be extremely price-conscious. Even the world’s greatest business is not a good investment if the price is too high. This will help investors stay ahead of the consensus. Since our inception in 2010 we have adhered to these principles of contrarianism. Our framework revolves around venturing into under-owned ideas of the markets. Uncertainty is a great situation for a contrarian.

Gold was a clear bet for us in 2018. The world was coming off a period of strong growth and the West had started waging a war on the East. The markets in 2018 were raving about small-caps and Mid-Caps. Moreover, money managers took up expensive themes like banking and FMCG as defensives. The following years proved to be a great run for gold, which eventually came into limelight at the start of the pandemic in 2020. With uncertainty prevailing on inflation, interest rates and liquidity, gold is a must have.

Contrarian investing is never easy, especially when you are early. We started advising on healthcare as a theme in 2018 since they were trading at extremely attractive valuations. Knowing us, with conviction we ventured into this space. Being early makes you see your investments temporarily lose value. At times, it can be as steep as 15-20 per cent. Those times will be testing. You hesitate to invest more and wonder if you are wrong. The temptation to get away from pain is too high. The irony is that investors need to show conviction when the evidence is inadequate. That is undoubtedly going to be the genesis of future investing success.

How can you make such contrarian approaches work? What is required is patience – loads of it. A contrarian approach will not follow timelines. While you may be right in your judgment, you need not be right in your expectations of timelines. Our contrarian ideas did give us a lot of pain in the initial years, but we advised on scaling up and staying invested. That is why having flexible investment timelines will help an investor manage his contrarian investment ideas successfully. History is replete with examples of great entries but poor exits. Making an exit is as important as making an entry. Abhimanyu in ‘Mahabharata’ was able to enter the impenetrable ‘chakravyuh, but did not have an exit strategy. 

Most investors make the same mistake. We believe that when contrarian becomes consensus, walk out. We advised on exiting healthcare in 2021. This only shows that well-constructed contrarian thinking approaches have a solid place in Indian investing. The upside from contrarian ideas will always beat returns from conventional and in-fashion preferences. Investors seeking alpha and better beta must understand the mantras of contrarian investing: strong conviction, loads of patience, sizing up and flexible timelines.


The writer is Designated Partner - Investment Advisor, ithought Financial Consulting LLP •  Email : info@ithought.co.in •  Website : www.ithought.co.in