Jim Cramer says, “Contrarian Investing? Forget About It”
A couple of weeks ago Mad Money host Jim Cramer made the above declaration regarding contrarian investing. He went on to say, “I think it’s wrong. I think it doesn’t matter… I think it’s really a treacherous way to invest.”
I was a little baffled when I saw excerpt. Then I saw the editorial written by Producer Drew Sandholm where he gave the following definition of a “contrarian investor:”
“In the investment world, a contrarian is someone who takes a position that differs from the majority. If a particular sector is ‘hated’ by most investors, a contrarian might want to buy in. After all, if few investors like the sector, a contrarian thinks there are few people left to sell, making it immune to big declines.”
Sandholm went on to write that Cramer feels the strategy to be “too hazardous” to recommend. It infers that contrarian investing is based purely on sentiment and that investors should be using fundamentals and research to decide which companies to invest in.
However, here at Investment U, we don’t feel these two things are mutually exclusive. You can still look for solid fundamentals in regions and sectors that were abandoned by “the herd.”
For instance, Alexander Green recently wrote about finding fundamentally sound companies in the beaten-down natural gas sector.
Contrarian Investing is Based on Fundamentals
Contrarians aren’t rebellious teens, rejecting their parents’ way of investing. What the piece misses is that contrarian investing is based on fundamentals. Many times popular investment sentiment is not. Do we need to remind you of the dot com and housing bubbles?
Investment U defines a contrarian investor as someone who believes in independent wealth building and profits rather than the actions of the herd. The key isn’t to go against the grain for the sake of being different, but to find opportunities based on solid fundamentals that are ignored or shunned by everyone else. And if this is done successfully, then you get in on the ground floor and watch profits rise as the rest of the investment world gets a clue.
In Cramer’s defense, I believe he’s specifically speaking about those investors who are looking at whether a sector is under or overweighted compared to the S&P 500 in an attempt to time the market. But that definition doesn’t cover the whole contrarian movement.
The Vast Spectrum of Contrarian Investing
I don’t think anyone out there would call Jim Rogers, George Soros, or Warren Buffett contrarian day traders. However, the contrarian part of that statement is true.
- Jim Rogers loves buying undervalued assets. What he saw in gold and silver over a decade ago, he currently sees in the agricultural sector. Agriculture prices are - on a historical basis - extremely depressed and this is where he sees his next opportunity.
- On September 16, 1992, Black Wednesday, Soros' fund sold short more than $10 billion in pounds, profiting from the U.K. government's reluctance to either raise its interest rates to levels comparable to those of other European Exchange Rate Mechanism countries or to float its currency.
- Warren Buffett is famously “greedy when others are fearful and fearful when others are greedy.” He focuses on the quality of the business rather than the short-term or near-future share price or market moves. He takes a long-term, large scale, business value-based investment approach that concentrates on good fundamentals and intrinsic business value, rather than the share price. His recent bets on housing are a good example of his contrarian prowess.
So, I do agree with Cramer that investors should avoid investing simply on sentiment. But that’s not our brand of contrarian investing anyways. We look for fundamentally strong businesses in areas where many investors essentially threw the baby out with the bathwater.