VALUE INVESTING
How To Be A Contrarian

By Stephen Bland (TMFPyad)
January 28, 2005

How much attention should you pay to what people say about shares or the market in general? There is substantial information overload available if you want to find it, not least on our own message boards. However, I use the word "information" very loosely. The great majority of what is written on message boards around the internet arises from those least placed to offer it or who have a personal agenda and consequently may be worse than useless. Whilst there is some worthwhile stuff out there, the problem particularly for the beginner is sorting out the cheat from the waff.

And it's not only the net. Press and broker comment, whilst it's just one way traffic in the sense that the writers write and the readers read, is frequently capable of delivering opinion which may appear to some to carry a lot of weight. Undeservedly in a lot of cases.

Take Lloyds TSB (LSE: LLOY) shares, in which I have the bulk of my personal funds at present and which is one of the best performing constituents of my high yield portfolio in our Value Investor newsletter. (The latest scorecard for Value Investor showed a gain of 21.7% for Lloyds TSB since it was picked in July 2004. The overall portfolio of thirteen high yield shares showed a gain of 14.6%.)

Only last week, the Investors Chronicle in its section on brokers' tips published very negative comment on Lloyds from two brokers, to the extent that one of them advised a sell and the other, underweight. These comments seemed so wrong to me that I was prompted to publish a contrarian message on our subscriber-only Value Investor board to the effect that this was great news for Lloyds and that high yield portfolio investors should take advantage of any consequent price weakness in the shares.

Be careful with contrarianism though, it doesn't always work out. You have to develop a feel for when it may or may not prove rewardingly indicative and even then you can still call it wrong. But to me the Lloyds comments last week to me screamed contrarianism.

Lloyds is a cheap major bank for no reason at all. And it has been cheap for a long time, years. I know, I've been holding the shares for a long time, years. And I know too that long times have a habit of being even longer times than one might think. And I know too that its value will out in the end for me, big time.

How do I know? Simple. There is no  reason I know why it shouldn't. And if there is no reason why it shouldn't then it should.

You can always find reasons to justify almost anything in the market if you look hard enough. Still with Lloyds, if you look on the company message board you will find talk supporting any point of view you wish. If you had no opinions but followed the Lloyds board for advice on whether to buy the shares or not, you would end up in a state of fiscal paralysis, doing nothing at all as you waver between the sides for and against this share. Same with press or broker comment, which you can find pro and anti the shares. Generally speaking though, I'd guess that the balance of the comment has been well on the negative side for some time now.

Perfect contrarian country. Plus of course Lloyds has a proper name instead of the alphabet soup that indicates the corporate title of most of the big banks these days. I get them all mixed up. Who can distinguish between BISCH, BOSH and ROBS or whatever they're called? In fact the only thing wrong with Lloyds is that it maintains the ridiculous TSB part of its name. Those mysterious three letters were the initials of a savings bank that it acquired millennia ago whose customers were all either under 5 or over 100 years old. Who knows or cares what this means any more? They didn't change their name upon making other major acquisitions like the Neasden & Clackmannan Building Society or Welsh Orphans Insurance so I suggest that they drop the TSB bit for nomenological reasons. It's a serious drag on the share price.

Bottom line is, find a share you believe in and hold it until you have reason not to hold it any longer. That means until you have good reasons based on fundamentals to exit, not because of idle message board chat or broker comment.

Ignore the noise. Take a free 30-day trial to my Value Investor newsletter and I'll show you how, and you can also discover which twelve other high yield shares I've selected to date.

Stephen owns shares in Lloyds TSB.