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A portfolio to bet against the masses

Who is a contrarian investor?
 
Most private investors who pick stocks – at least if you believe what they say when you ask them.
 
Who isn’t a contrarian investor?
 
Well, by definition nearly everyone!
 
Contrarian investing means going against the consensus – buying shares in a contrary fashion, as the name suggests.
 
It involves doing what feels unpopular at the very least, and often stupid or recklessly risky at worst.
 
If you don’t feel like an idiot at least once a week about your portfolio, then you’re probably not really a contrarian investor.

Clubbed to death

When you’re a contrarian investor, you’ll usually find yourself buying companies that face obvious challenges.
 
Difficult external factors like a sector in a slump or an economic downturn, internal issues such as profit warnings, management bungling and botched execution… the list goes on and on.
 
Alternatively you might be buying a company that you rarely even hear anything about, because everyone has forgotten it even exists and has left that corner of the market for dead.
 
You’re an ambulance chaser or you’re a gravedigger. You can see why contrarian investing isn’t the most glamorous way to put your money to work!
 
Why do so many people happily consider themselves contrarians these days, then?
 
Partly I think it’s a legacy of the financial crisis and the deep bear market that followed in 2008 and 2009. So many people were wrong about so much, and got burned so badly, that nobody wants to be seen trusting the system or the markets any more. It feels foolish.
 
I also think people get myopic, and underestimate groupthink.
 
Before the commodities sector’s big slump, for instance, it seemed to me that most private investors I met were into small oil exploration companies and gold miners. They considered themselves contrarians, because (as they saw it) the rest of the market hadn’t realised the world was about to run out of cheap oil, and because banks were destroying faith in flat currencies through low interest rates and quantitative easing.
 
The thing is, they all thought this!
 
It was very hard to argue with them – if you suggested perhaps there was some froth in those sectors and maybe they should for instance look into some of the small-cap companies in other areas that had previously been popular with private investors, they looked at you almost pityingly, and then went back to talking among themselves about geological formations off the coast of West Africa.
 
Needless to say when the mining and energy mini-bubbles popped, an awful lot of supposedly contrarian private investors found themselves in the same sinking boat.
 
Today I’d say investors in so-called quality companies – particularly ones that do dull things like make soap or sell electricity – are perhaps the biggest group who believe they’re doing something different but are really all in one very big boat.

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They all believe they’ve turned away from the glamour and growth in the market, and that they’re cunningly settling for slower and steadier growth, and the “forgotten” power of dividend reinvestment.
 
So many think the same thing that to me the sector has been bid up to unattractive levels.

A mini-portfolio of unpopular companies

Of course, I consider myself a contrarian investor, too. And no doubt I fool myself some of the time with this self-labelling.

But I do know that I am in disagreement enough both with other private investors and even with other Foolish colleagues that I must be doing something right.
 
(Or should that be “wrong”, from a contrarian perspective?)
 
I thought it’d be fun, then, to give you an example of a mini-portfolio that a contrarian investor might buy today.
 
I’ve picked five companies that all face headwinds, but which mostly also boast very decent yields as a result of their unpopularity.
 
Of course, received wisdom is that high yields are nearly always bad news, because they indicate companies in trouble (and which hence have depressed share prices) and uncertainty over the dividends.
 
But we’re being contrarian here, remember?

Company

Sector

Yield

Contrarian Cloud

BP (LSE:BP)

Energy

7%

Oil price slump

City of London Investment Group (LSE:CLIG)

Fund management

6.5%

Emerging markets

HSBC (LSE:HSBA)

Banking

7%

Low rates, China

Land Securities (LSE:LAND)

Commercial property

3.3%

Brexit

Persimmon (LSE:PSN)

House building

6%

Brexit, stamp duty changes

Will all five of these companies defy the doubters, maintain their dividends, and eventually go on to deliver strong capital gains when the clouds hanging over them drift away?
 
Unlikely, I’d say. But that’s not the goal.

You will never be all right, all the time 

Picking troubled shares involves making mistakes just like any other facet of investing. So I’d be very surprised if in 3-5 years we will be able to look back at this table and see a clean sheet of winners.
 
However, if one or even two of this fairly diversified group of companies cuts its dividend or otherwise stumbles along the way, the value that’s potentially on offer with the group as a whole means to my mind a patient contrarian investor would have a decent chance of seeing an overall strong return.
 
Of course it won’t be smooth sailing, but with an average yield of around 6% you’re arguably being paid to take a bit of punishment while you wait for better times.
 
Besides, you’ll want to earn some battle scars in your quest to beat the market by fighting against the consensus.
 
Making a few bad bets is another sign that you’re truly a contrarian investor.

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Owain owns shares in BP, HSBC, and City of London Investment Group. The Motley Fool has recommended shares in BP and HSBC.