The Loneliness of the Contrarian Investor

LONDON -- 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 criticism 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 and go against what everyone is telling you. Perhaps the only thing that sustains you is the belief that you will be proven right in the end.

Taking a bite out of BARC
Take Barclays (ISE: BARC.L) . In early July, the company was hit by the LIBOR-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 with a rise in the FTSE All-Share of 3%.

First on my watchlist
Then there was FirstGroup (ISE: FGP.L) . People said they wouldn't touch the company with a barge pole. They said 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, FirstGroup 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 FirstGroup'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 (ISE: BDEV.L) 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 skepticism.

Since then, the firm's shares have bounced back with a vengeance. They are now up a whopping 69%, compared with a rise in the wider U.K. market of 5%.

The knives that bounced
Catching falling knives has been something of a theme in my contrarian investments. My philosophy is that 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 (ISE: ADM.L) 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 unconvinced, and my contrarian antennae were twitching. After I tipped it in December of last year, the share price recovered dramatically. In reality, the fall had been a case of Mr. Market getting overly depressive about the company's prospects. Admiral has actually continued to grow. Its shares are now up 28%, compared with a rise in the All-Share index of 5%.

In the same article I tipped satellite communications company Inmarsat (ISE: ISAT.L) . Again, the share price had halved, even though the firm was continuing to grow. For me this looked like a smoking bargain -- another case of a share price crash that was unjustified and a company that was out of favor but fundamentally strong.

Buoyed by a much-improved recent set of results, the shares are now up some 33%, as opposed to a wider market rise of 5%.

With the highs come the lows
My contrarian plays have been by far my best tips, substantially outperforming the FTSE All-Share. Perhaps I am on to something.

If this is all starting to sound a bit too smug and self-satisfied, my growth share tips, by contrast, have not done nearly so well. There have been several notable, and painful, flops (will I ever get over the infamy of SuperGroup?).

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 will be 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-favor shares with great prospects, he has amassed fortunes for those canny enough to have bought into his funds. Read all about it in "8 Income Shares Held By Britain's Super Investor."

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Prabhat owns shares in Barclays and Admiral Group, but not in any of the other companies mentioned. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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