As you scan the landscape of carnage all around in the mining and commodity sectors, we see many people who like to fancy themselves as contrarian investors. It is easy to see the appeal. Many of the most successful names in the industry have developed reputations as being great contrarian investors. Outside of mining and commodities, some of the greatest investors of the past century (and richest people on the planet) have developed reputations as contrarian investors. So it begs the question, with these icons of investing being noted contrarian investors, why isn't everyone a contrarian investor?
I think there are two things to keep in mind when deciding whether being a contrarian investor is right for you. First, being a contrarian investor is really damn hard. When the contrarian opportunities become available, they don't look appealing. In fact, they look quite the opposite. There is generally a sensible reason why other investors are running away from the opportunity. Additionally, within a retail context, it also involves the possibility of being on the receiving end of scorn and ridicule. If the positions that someone is taking that are purported to be contrarian are popular and well-received in a broader audience... is it actually a contrarian position? Not only does being a contrarian involve having thick enough skin to withstand the ridicule, but it also requires having a good deal of patience. My observation is that there are far too many people who want to rake in similar benefits as other highly-successful contrarians, but have very little interest in demonstrating the conviction that it takes to actually go all the way with a contrarian bet. One of the aphorisms my father always used to tell me was, "If you want to have things that others don't have, you need to be willing to work and do things that others aren't willing to do."
The second important part of being a contrarian investor is being a selective contrarian. The essence of contrarian investing is that there are times when the market gets things incredibly wrong, which create amazing opportunities that can be exploited in order to reap unbelievable rewards. While it is true that there are times that these opportunities do manifest, there is another reality that any prospective contrarian investors needs to accept. Even if the market gets things wrong from time to time, it is one of the most accurate prediction tools ever developed. To truly be successful as a contrarian investor, selectivity is key. Being a profligate contrarian (believing that the market is always wrong) is a road to financial wastelands and shattered dreams.
The contrarian opportunities available to us right now are amazing, but so are the risks. Choose wisely (and selectively) my friends!
