Beyond The Headlines

Can We All Be Contrarians?

The major US indexes sold off in the last few weeks. This inspired a whole range of reactions. Many panicked, some froze, and others quickly acted and bought selected stocks. The last group is usually smaller and follows Warren Buffett’s famous wise words: “be fearful when others are greedy and be greedy when others are fearful.” If we define a contrarian as someone who tends to go against the crowd, I start to wonder if we all can be contrarians at the same time? Can we?

When I was growing up in the 1990s Poland, you had to save to buy anything from a TV to a car. Friends and family could help, but consumer credit wasn’t readily available. I recall that interest rates were high, inflation was roaring, and uncertainty abounded. Interestingly enough, that is a set of circumstances that most US investors, especially those my age, have never experienced personally. However, they might be getting a very subtle taste of it these days.

Years have passed, today’s Poland and even more so the US have definitely different shopping habits than those I grew accustomed to. The motto is: buy now and pay later. More and more goods from small items to cars are available through monthly payments. Cars are available through various financing methods; many don’t even give you the actual ownership of the vehicle. What’s more, it seems it would take an excellent knack for numbers and a robust financial calculator to figure out the actual total cost to enjoy that car over the next few years.

My cautious view on consumer credit shared by the majority when I was a kid has become a contrarian view in today’s world. Was everyone a contrarian then, and a few are today?

Maybe what we do as money managers, investment advisors, investors is less about being contrarian and wisely and selectively opposing the views of the majority, but rather about keeping our principles permanent no matter how much the world around us gets lured by greed and tormented by fear.

A calm, collected, disciplined approach of evaluating businesses based on their fundamentals and buying based on value can be applied in the midst of a market euphoria as it is in the darkest moments of a market crash.

The same investment principles might have led us to buy an underappreciated railroad stock some 150 years ago, a promising retailer 50 years ago, and an asset-light cloud-based high, margin technology-driven company today. The principles remain the same.

What we do is as important and as simple as what  Morgan Housel (a prolific financial writer and author of The Psychology of Money) described recently as “Outperforming by merely ‘doing the average thing when everyone else around you is losing their mind.’”

I recently took a closer look at a company that we have known for years. It’s a stable, high free cash flow business that got caught in the pandemic rollercoaster ride of rising demand, input cost inflation, and supply chain headaches. What intrigued me the most were the clear and wise principles that frame and shape the management’s decisions. All I need is a few years’ worth of annual reports and financials, and an evening or two later, I can tell you the vivid story of the business and present it as a clear series of choices the leadership made.

Over the last decade or two, many companies like this one have taken advantage of low-interest rates and credit availability. They decided to borrow to pay excessive dividends and conduct share buybacks at very high prices. It’s all usually done in the name of a quick rise in per-share profits and the stock price. Short-term stockholders applaud and get a quick boost, while the company is left with debt and very few options to maneuver in times of distress.

This company continued to follow the same principles that many others followed not long ago. Because it remained set on its course, it suddenly found itself as a contrarian. Again, it’s not that it choose an opposing view to others, but rather the others made choices that are at odds with the ones of this particular company.

When the US stock indexes came under pressure in January 2022, we watched how our holdings performed. We realized again, what we often shared before – sometimes what we don’t own matters as much or more as what we do own. Our portfolios of 30-60 stocks aspire to weather the market storms better than the broad market indexes. Is it always the case? No, but it often makes enough of a difference and allows us to sleep better.

With prices of many stocks falling, we immediately started searching for buying opportunities. We looked at the fundamentals, the actual earning power of a business, and the newly discounted prices that we would need to pay. The indexes were down 10-15% or so. The true treasures appeared among stocks down 40%-60%, not just in the previous four weeks but also in the last few months.

Many of them were down for likely the right reasons, but we believe some look disproportionately punished by the negative investor sentiment that started to prevail. As many of our clients rightly assumed, we went shopping. We gradually and cautiously acted on the new opportunities that appeared right in front of us.

Does a 10-15% sell-off mean there won’t be another one sometime soon? – No, but the panicked sellers left enough buying opportunities behind that we couldn’t ignore them. Will the prices get even more attractive in the future? – Maybe, but that’s why we buy some and leave room to add earlier. It’s been our practice for years.

Were we contrarians buying in the sell-off? Judging by the majority view that led to the sell-off, we held an opposing view, maybe even a minority view. Among the like-minded investors, we were all contrarians, though. After a number of phones calls and emails with friends and colleagues who share the same investment principles, we discovered that others were looking and shopping, too. We hold the same timeless principles in that particular group of disciplined investors (no matter how small it’s become), and we are definitely all contrarians!

Happy Investing!

Bogumil Baranowski

Published: 2/3/2022

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The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

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