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Wm. Morrison Supermarkets Plc, Neil Woodford And The Art Of Contrarianism

Can you have a fashion for contrarian investing? It seems to be a contradiction in terms, and in a way it is. But if there ever was a buzz for contrarian investing, it is now.

The thing is, contrarianism runs contrary to the nature of most people (by definition). However much our rational minds try to be contrarian, our sub-conscious — our ‘inner chimp’ — rebels fiercely against it. And if you believe, like me, that investing is really all about psychology, that explains why — however much we shout out about the importance of being contrarian — so few people are able to be really good contrarian investors.

The simple truth is that there are so many ways to get contrarianism right, but there are just as many ways to get it wrong.

Buffett and Kipling

After all, hasn’t Warren Buffett been advocating being ‘greedy when others are fearful, and fearful when others are greedy’ for decades? But has this changed investor behaviour? Of course not — most people still buy high and sell low.

But if you can, despite everything, control that ‘inner chimp’, and you are able to buy when everyone else is selling, you are able to plunge in when everyone else is running a mile, then, as Rudyard Kipling would put it, yours is the Earth and everything that’s in it.

2012, which was a year of recovery after the horrors of 2011, proved to be a great year for contrarian investing. In 2013 we see something unfamiliar to new investors: a raging bull market. As the market forges ahead, will contrarianism still work well?

Contrarianism in a new bull market

In many ways, investing in a bull market is easier than investing in a market that is floating in the doldrums. More shares rise than fall, and most canny investors make money.

I believe that contrarianism works well in this environment. But I would combine it with a focus on good-value blue chip companies. Like an example? Take a trade by one of the new masters of contrarianism: Neil Woodford.

A few months ago, he bought shares in supermarket group Morrisons (LSE: MRW). At the time the share price had slumped, as investors feared the company was wilting in a hugely competitive market.

But since then Morrisons has figured out a turnaround strategy that has convinced investors, and the shares are already surging ahead. It has identified its weak points, and is working hard to improve them: it is investing in smaller town-centre stores, in improving its presence in the south of the country, and also in its online offer, as evidenced by its recent deal with Ocado. If it can make real progress in these areas, the potential for growth — and thus for upside in its shares — is fantastic.

In my mind, this is a great way to invest: you choose a robust blue-chip company. It is in a growing industry (supermarkets). It is out of favour and thus cheap, yet there is a decent chance of recovery. This is the essence of contrarianism — and it really works.

Free report

There is much we can learn from Woodford’s investments. His ability to achieve market-beating returns over a decade when the stock market has been moving sideways is impressive. Want to learn more about his latest investments? Then just read this free report, “The FTSE100 Shares That Britain’s Super-Investor Owns”.

> Prabhat owns shares in Morrisons. The Motley Fool has recommended shares in Morrisons.