Like most stock pickers, I think of myself as a contrarian investor.
In other words, looking for value in companies that others have left for dead. Trying to buy £1 for 50p. Being fearful when others are greedy and greedy when others are fearful. Aiming more for The Big Short than The Little Chump.
Who would want to instead run with the herd and go with the crowd?
Well, people who invest in index funds for starters. By being contentedly average, they can ironically do better than bad stock pickers – and the latter includes many professionals, going by their market-lagging records. Getting the market return from a tracker fund with only low fees knocked off can take you far when investing for the long term.
But if like me you want to try to beat the market, being contrarian usually goes with the territory.
Most of history’s famous investors – and pretty much all the ones who wrote the books – were contrarians. Their wonderful returns speak for themselves.
Opportunity knocked
So being a contrarian sounds great when you read about it.
But here’s the dirty secret… most of the time it feels terrible!
Case in point: investing in UK banks.
Putting your money into the companies that almost ended Western civilisation a few years ago, that remain public enemy number one, and that trade in most cases below the value of the assets on their books seems to me almost the definition of contrarian investing.
But it also feels awful. Not just because you don’t want to admit to your friends and family that you’re an investor in these craven cabals of blood-sucking financial leeches and vampires, but because you’ve probably not made any money from it recently.
Three years ago – five years after the end of the financial crisis – the economy was clearly on the mend. Unemployment was falling and house prices were rising. Yet people still hated banks with enough blood-spitting vehemence to make one think that the shares might just possibly be under-owned.
It certainly got my contrarian senses tingling.
Don’t bank on it
The economy has indeed continued to prosper since 2014. We have record employment while house prices have soared. Our economic growth was the fastest among the developed nations until recently.
Yet here’s how the UK’s five big banks have performed over the past three years:
|
HSBC |
6% up |
|
Lloyds |
8% down |
|
RBS |
12% down |
|
Barclays |
15% down |
|
Standard Chartered |
44% down |
Okay so I’ve ignored dividends (which were only substantial in the case of HSBC) but still, this is miserable stuff.
True, the FTSE 100 hasn’t roared away either. It beat all five of these banks though.
Financial insecurity
It’s not even like the banks have stepped up for their contrarian investors and made them feel proud to own them while waiting for the market to catch up.
Rather, the banks have repeatedly sent investors’ heads plunging into their hands:
- HSBC was caught up in news its Swiss private bank helped clients avoid millions in taxes.
- The boss of Lloyds found tabloid attention for goings-on in his private life, while the bank’s Halifax division was hit by revelations concerning the HBOS Reading branch that ran the gamut from bribery to a whole lot worse.
- Barclays had to reach settlements involving financial crisis-era Libor fixing, while regulators have more recently begun investigating attempts by the CEO to unmask a whistleblower.
- Standard Chartered had to raise £3 billion in fresh capital in late 2015 – again, years after the banking crisis supposedly ended.
- RBS has, well, continued to lose money hand over fist.
Not all of the challenges turned out to be material. But they – and the others I’ve not even listed – have tested their contrarian shareholders’ resolve.
That’s to say nothing of the disappointing financial developments, such as HSBC dramatically lowering its return targets or Barclays cutting its dividend.
If you’re smiling you’re doing it wrong
I’m not here to tell you whether this or that bank will prove to be a better investment over the next three years.
Nor can I say that no more scandals will emerge. It’s safer to assume they will!
I believe some banks could be outperformers from here, but the market isn’t stupid and it has marked down these shares for a reason. There are risks as well as potential rewards.
No, I’m simply giving a snapshot into what real contrarian investing can be like.
In theory it looks great – sectors flip into favour, share price graphs move off to the right and up, and stellar long-term investing records are printed in bestselling biographies.
But history is deceptive. Big investment themes that require a moment to absorb when you look at a graph can take many years to play out. Things almost invariably get worse before they get better – and they don’t always get better.
That is the real life of a contrarian investor. Waking up most days feeling like there are dogs in your portfolio, and wondering whether you can keep putting up with the fleas and the howling at the moon (and that’s just you) or whether you should end the pain and put them to sleep.
I believe if contrarian investing works, it works because a lot of the time it feels miserable.
And most people would rather avoid feeling miserable!
