Sanjay Bakshi Discusses Contrarian Investing
Question 1: What would you define as a contrarian investing?
To me contrarian investing is not about betting against the crowd. It’s about having an independent mind. Ben Graham used to say, “You are neither right nor wrong because the crowd disagrees with you. You are right because your data is right and because your reasoning is right.”
Some people mistakenly believe that automatically betting against the market i.e. being a blind contrarian is a good investment strategy. That’s a foolish way to think about it and the functional equivalent of driving on the wrong side of the road — which is sure to eventually cause an accident.
Question 2: How does it differ from value investing?
Instead of using the term “contrarian investing,” a better term to use would be “contrarian mindset.”
Having a contrarian mindset is terribly important in my view. A contrarian mind is an independent one. Anyone with a contrarian mindset would look at things skeptically and not get swayed by the fads of the moment. An investor with a contrarian mindset, would have kept away from dotcoms in 1999.
All value investors have a contrarian mindset because they don’t get swayed by the crowds. They look for value in unpopular, out-of-favor situations. However, that’s not all they that they do. Even in some popular sector, they may invest in a business because their data and analysis shows that despite the popularity of the sector, the business is undervalued.
Many great long-term investments, for example, have been made at what appears to be a high P/E ratio (a ratio which is often cited to illustrate popularity). The reason why those investments turned out to be excellent ones in the long run is that despite the so-called popularity, they were still under-valued.
So, I would say that all successful value investors with an excellent long-term track record are likely to have a contrarian mindset.
Question 3: Can you give 3 – 4 examples of sectors that would be contra bets just to help readers put the point across? (I am assuming you may not like to mention specific stocks)
One example is the real estate industry. Back in 2007, it was extremely popular. People bought real estate stocks because other people were doing it. It was crowd mentality at work, not careful data collection and analysis. In 2012, that sector was deeply out of favor for very good reasons. That’s because most of the large real estate companies became huge value destroyers and some were found to have indulged in fraud.
But the rightly deserved taint of the industry is wrongly applied to some excellent companies in that space. So for a value investor with a contrarian mindset, it was be a good place to look for value.
Question 4: How should you provide for the chances of going wrong?
By staying true to the discipline of the advice by Keynes who said: “When facts change, I change my mind.”
Making mistakes is ok. Perpetuating them is not. You’ve got to have a system that will help you recognize mistakes early and correct them. You can also greatly reduce the chances of making mistakes by staying away from poor quality businesses and managements and also by avoiding overpaying for anything you buy.
Question 5: Would you also classify gold and silver as contra bets?
Those two metals don’t quality as investments in my view, because they don’t generate cash flow.