It's a hard life being contrarian...
It's a hard life being a contrarian investor. Going against the crowd is (by definition) a solitary pursuit. Every time I write an article about a contrarian play, I seem to face a wall of opprobrium and disdain.
No one seems to believe you. Everyone thinks you are out of your mind. But despite it all, you stick to your guns; you go against what everyone is telling you. Perhaps the only thing that sustains you is the belief that you will be proved right in the end.
Taking a bite out of BARC
Take Barclays (LSE: BARC). In early July the company was hit by the LIBOR rate-fixing scandal. All hell promptly broke loose, with the chairman resigning, followed swiftly by the chief executive. The share price crashed; was this a buying opportunity? I thought so, but poster after poster thought I was nuts to buy in.
I was told I was speculating, not investing. That Barclays was definitely not a share to buy for the future. I was told that I bought Barclays because I had done no analysis.
But I held on grimly to my shares, in the face of all the derision. What actually happened? Barclays shares are up 15% as I write this article, compared to a rise in the FTSE All-Share of 3%.
First on my watch list
Then there was First Group (LSE: FGP). People said that they wouldn't touch the company with a barge pole. They said that there was a great risk that it would lose a franchise. They said that even at this low price, the equity was overvalued.
But my contrarian senses were alerted. For me the company was just too cheap, and so in May I called it a falling knife I might catch. What actually happened? Well, amid all the fear that it might lose a franchise, First Group actually won the West Coast franchise. The transport company's shares are now up 19%, as opposed to a rise in the FTSE All-Share of only 6%.
Could you have waited until the news of First Group's franchise win had been confirmed? Yes, but it would have been too late -- by the time the news was announced, the share price had already recovered.
At the end of last year I proposed Barratt Developments (LSE: BDEV) as a contrarian play. This was a time when no one was touching the shares of housing developers. With so much fear around, maybe, just maybe, it was time to be greedy. Again, I was met with scepticism.
Since then the firm's shares have bounced back with a vengeance. They are now up a whopping 69%, compared to a rise in the wider UK market of 5%.
The knives that bounced
Catching falling knives has been something of a theme in my contrarian investments. My philosophy is, if you can find a share that has been battered by the markets but is still, in your view, a fundamentally strong company with great prospects for the future, then you should buy into it.
Admiral Group (LSE: ADM) is a company whose business is based on price-comparison sites and online insurance, which for me represents the future of insurance, yet its shares had been absolutely smashed, halving in value in a few months. The share price fall was based on the premise that its growth had dramatically slowed.
But, again, I was not convinced, and my contrarian antennae were twitching. After I had tipped it in December of last year the share price recovered dramatically. In actual fact, the fall had been a case of Mr Market getting overly depressive about the business's prospects -- Admiral has actually continued to grow. Its shares are now up 28%, compared to a rise in the All-Share index of 5%.
In the same article I tipped satellite communications company Inmarsat (LSE: ISAT). Again, the share price had halved, even though the firm was continuing to grow. For me this looked like a stonking bargain: another case of a share price crash that was unjustified, of a company that was out of favour but that was fundamentally strong.
Buoyed by a much-improved recent set of results, the shares are now up some 33%, as opposed to a wider market up 5%.
With the highs come the lows
In actual fact, my contrarian plays have been by far my best tips, substantially outperforming the FTSE All-Share. Perhaps, just perhaps, I am on to something.
If this is all starting to sound a bit too smug and self-satisfied, in contrast my growth share tips have not done nearly so well, with several notable, and painful, flops -- will I ever get over the infamy of Supergroup (LSE: SGP)?
Why the difference? Well, I just think that contrarian investing is something that works for me. Would it work for you? That is something only you can decide. Psychologically and emotionally, every person is different.
In the end, I don't mind that people don't believe me. Lately, I have begun to regard all the negativity as just another contrarian indicator. In fact, when people start agreeing with me, that is the time to worry....
Someone who I think is a master at the art of contrarian investing is Neil Woodford. By investing in out-of-favour shares with great prospects, he has amassed fortunes for those canny enough to have bought into his funds. Read about it in "8 Income Shares Held By Britain's Super Investor".
More investment opportunities from The Motley Fool:
> Prabhat owns shares in Barclays and Admiral Group, but not in any of the other companies mentioned.