What if everyone was a contrarian?

“The Contrarian” – We investors have come to love the term. It describes just about every great inventor, idealist and leader throughout our history.

To be a contrarian means to go against the grain, to zig when everyone else zags, to fight the conventional wisdom when the world says “the earth is flat”. After all you can’t get the best results on Wall Street if you’re fully invested in an index fund. But what if everyone woke up one morning and decided to be a contrarian? Call it a contrarian’s hell.

“Be greedy when others are fearful and fearful when others are greedy” we are told. But what about when being a contrarian to the general sentiment is outright wrong? If the whole world suddenly became bullish on commodities like they did just last May would that be a sole and solid reason to sell?

Yes and No. When Warren Buffet was asked in hindsight if he would have sold his over-speculated positions in stocks in late 1999 he replied that he would have, but who can see something in hindsight. If we follow with a focused “It’s a Bull Market” then how can we ever sell?

This seems to be the predicament in today’s markets. As gold and commodities hit all-time highs in 1980, newspapers were reporting the “Death of Equities” after stocks went nowhere for almost 14 years. Selling out of your gold bullion and into boring stocks then was probably the most contrarian thing you could have done. Only until 1985 did many realize that the commodities run was long over and that stocks held a much better long-term value than any other asset class. It was a true contrarian move and required a solid amount of audacity with it.

The same applied in 1999 when every analyst on planet earth was cheering on every tech stock from the newest “Dot Com” IPO to the “next Microsoft” (albeit with zero earnings). A handful realized that stocks had little further room they could go and decided to transfer their savings to safer asset class – Real Estate. With interest rates ready to fall and many properties left undervalued, contrarians scrambled for opportunities. Others ran for even safer assets such as commodities and gold.

As figured, stocks fell, and sharply, while residential housing, condos and REITs all soared. Once again the contrarians saw themselves being followed. Seeing that commodities had already risen substantially, they felt it too speculative and headed back into stocks, even the same tech stocks they so vehemently dashed from only 6 years earlier.

So now the contrarians face a dilemma. Do we buy overvalued stocks, over-speculated commodities or credit sensitive Real Estate?

I reckon that at the end of the day the answers to all these questions will become clear. In this case to be a contrarian is no longer to search for a means of better returns but for returns at all. The true contrarian will see a world of speculators hungry for a quick million or a new ETF that can double their money in 18 months or less or their money back.

He or she will reason that today a safe investment is a good investment. Unfortunately we aren’t the geniuses that bought Coke in 1987 or Corn in 1999, but we can be the ones that protect our wealth while the rest of the world loses it.

This can only be done in the long-term. Corrections will occur whether you’re invested in a Bolivian Gold Mine or in Chinese Telecom. But the enduring investor will sit by quietly adding to his position while the world gripes with their stash of dollars looking for the next easy million, fruitlessly, while only those who can indeed “stay solvent longer than the markets will remain irrational” will be rewarded, and how.

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