When it comes to investing, many of us follow the herd. Most investors suffer from trying to gauge the market based on whatever everyone else is doing, and that’s the worst thing you can do for your portfolio. This sort of behavior can sap returns and even result in some pretty big losses when the trend dies and you’re the last one piling in. All in all, this fact is the number one reason why most individual investors have only earned an annual return of 5.02% over the last 20 years, while the S&P 500 Index averaged 9.22%.
Going against popular opinion can be the secret to enormous and market beating profits for investors. Dubbed contrarians, these investors are often the first ones to spot a trend, when the market is still riding high on the previous one. For the regular retail world, it pays to follow the sage advice of these contrarian investors. Here we highlight some of the most prolific contrarians on Wall Street.
After graduating from the University of Manitoba in 1958, David Dreman worked in a variety of equity research positions—at both Rauscher Pierce & Seligman—before founding his own investment firm Dreman Value Management back in the 1970’. It was here that Dreman first began to use contrarian investing to his advantage.
What Dreman Is Known For
Dreman and contrarian investing go hand in hand. The fund manager’s main style and mantra is to buy out of favor stocks with low price-to-earnings (P/E) ratios. By focusing on firms with solid earnings growth, strong fundamentals, strong finances, excellent cash flow and high yields, Dreman has been able to shift through market panics and unloved firms to find true values. The fund manager often cites his discipline to stick to these numbers and metrics, rather than chase trends with his fund’s continued success.
He certainly has academics on his side as numerous studies show that purchasing these low P/E and low price-to-book (P/B) stocks leads to outperformance over the longer haul. That fact has helped his previous mutual funds rack-up impressive long term returns. However, in the short run, this method of sticking to his guns has cost the manager a few times, including during the Great Recession. Dreman currently manages separate accounts for high-net worth individuals and institutions.
Dreman has written five books on contrarian investing including his latest, “Contrarian Investment Strategies: The Psychological Edge.” He has also been a columnist for Forbes since 1979.
Dreman’s Words to Live By
“If you have good stocks and you really know them, you’ll make money if you’re patient over three years or more.”
“Psychology is probably the most important factor in the market – and one that is least understood.”
Citing his job selling peanuts and picking up empty bottles at baseball games when he was kid as the basis for his work ethic, Jim Rogers was a tenacious analyst at several Wall Street firms before getting a job at Arnhold and S. Bleichroeder. It was here that Rogers met George Soros and developed his style of contrarian investing.
What Rogers Is Known For
Jim Rogers is most known for his investing in commodities. Much of Rogers’s thinking stems from the supply and demand imbalances of the world’s need for more natural resources. This has caused him to be an early investor in several metals and agricultural commodities before they became popular, including a hefty bet on gold prices before they ran-up after/during the Great Recession. Rogers has since created the Rogers International Commodity Index (RICI), which has gone on to outperform several traditional commodity index measures. Rogers was also an early investor in the numerous opportunities in China and he considers the emerging market nation to be the real driver of the global economy.
Rogers honed his contrarian investing skills with Soros at their investment firm called the Quantum Fund. That hedge fund was one of the world’s first truly global funds and during the first 10 years of operation, the portfolio gained 4,200% while the S&P only advanced about 47%.
Today, Rogers has since retired—at 37 years of age—and lives in Singapore. The former fund manager now only serves to manage his own investments, which include a hefty dose of gold and agriculture.
Rogers has written six books, including two down-to-earth tomes on China and commodities investing: “Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market” and “A Bull in China: Investing Profitably in the World’s Greatest Market.”
Rogers’s Words Of Wisdom
“The price of a commodity will never go to zero. When you invest in commodities futures, you’re not buying a piece of paper that says you own an intangible piece of company that can go bankrupt.”
“Do not buy the hype from Wall St. and the press that stocks always go up. There are long periods when stocks do nothing and other investments are better.”
Sir John Templeton
Born in 1912, Sir John Templeton managed to come of age at one of the worst periods of history for the stock market: the Great Depression. After attending Yale University, Templeton work as a trainee for Fenner & Beane, which is one of the predecessor firms of Merrill Lynch. In 1937, He struck out on his own, formed his own firm and made investment history with his contrarian ideas.
What Templeton Is Known For
The most famous Templeton contrarian investing story deals with buying what’s hated. During the depths of the Great Depression, Templeton took $10,000 and began buying every stock on a major exchange that was trading for $1 or less. There were just over 100 stocks in all. While some of them failed, the vast majority went on to be huge performers and showed Templeton that markets often overreact to bad news.
This event changed Templeton’s life forever and allowed him to form his own firm.
It was at that firm that Templeton was credited with his biggest contrarian idea of all: getting global with his investments. At the time, American investors generally shunned buying stocks of foreign firms as it was difficult to understand and not as simple as buying an ETF that tracked them. Templeton realized that bargains existed all over the world. Like many contrarians, he searched for low priced and quickly growing firms. The kicker was he searched in many places most investors at the time feared to tread.
These Templeton funds were later sold to Franklin investments, but not after racking up some of the world’s most impressive gains.
Templeton’s Words To Live By
“Invest at the point of maximum pessimism.”
“If you want to have a better performance than the crowd, you must do things differently from the crowd.”
Warren Buffett is the world’s most famous investor, and he has been interested in business and finance since he was a kid. During his childhood days, Buffett ran businesses covering everything from selling chewing gum and Coca-Cola door-to-door to owning a series of pinball machines in local shops. It wasn’t until he enrolled at Columbia Business School and became a disciple of value investor Benjamin Graham that Buffett became everyone’s favorite contrarian.
What Buffett Is Known For
Buffett is the ultimate Graham-Dodd investor. Like many of his contrarian peers, Buffett focuses on buying cheap stocks that are trading for less than their intrinsic values. A prime example of this was his 1961 investment in the Sanborn Map Company. Sanborn stock sold at only $45 per share, while the underlying investments that Sanborn owned were worth $65 per share. Buffett explained that buyers valued Sanborn stock at “minus $20” per share and were unwilling to pay more than 70 cents on the dollar for an investment portfolio with a map business thrown in for nothing.
These kind of value investments helped Buffett steer Berkshire Hathaway to amazing results. A $10,000 investment in Berkshire Hathaway in 1965 would be worth in excess of $50 million today.
Today, Buffett continues to control Berkshire Hathaway. However, given the size of the company, Buffett focuses less on stock selection and more on buying businesses outright or looking in the private sector for buys. He still looks for contrarian-styled deals that offer good return on capital without a lot of debt.
Buffett’s Words Of Wisdom
“Rule No.1 is never lose money. Rule No.2 is never forget rule number one.”
“Shares are not mere pieces of paper. They represent part ownership of a business. So, when contemplating an investment, think like a prospective owner.”
“Be fearful when others are greedy, be greedy when others are fearful.”
Born in Budapest, Hungary, George Soros’s story is certainly one of rags to riches. Escaping The Holocaust, Soros studied at the London School of Economics in England and eventually came to the United States. It was here that he met Jim Rogers and started the Quantum Fund. However, unlike Rogers, Soros didn’t retire early, and instead started Soros Fund Management. This is where Soros really began making his fortune.
What Soros Is Known For
Soros’s brand of contrarianism deals with taking economic news and using it to his advantage. The fund manager has a skill at predicting what will happen from various bits of economic data. By getting out ahead of the herd, Soros has been able to profit handsomely. While Soros does sometimes use stocks to profit from this skill, his preferred asset classes are bonds and currencies. As a bond vigilante, Soros has been able to force several nations to deal with their economic problems and he has profited while doing so.
A famous example of this was his trade on the British pound. On September 16, 1992—which has been dubbed Black Wednesday—Soros’s fund sold short more than $10 billion in pounds. The underlying idea was that the Bank of England would have to raise its interest rates or float its currency. The UK was forced to devalue the pound and Soros made $1 billion in one day. Soros made a similar trade against the Thai baht and triggered the Asian financial crisis in 1997 [see also The Best Investments of All Time].
A few years ago, Soros closed down his hedge funds and returned outside investor money. Since then Soros has spent much of his time giving his massive $26.5 billion fortune away through various charities. He has written 14 books and countless newspaper and journal articles discussing his views on the world and life.
Soros’s Words To Live By
“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.”
“Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.”
“The financial markets generally are unpredictable. So that one has to have different scenarios… The idea that you can actually predict what’s going to happen contradicts my way of looking at the market.”
While Sam Zell may not be as famous as George Soros or Warren Buffett, he is equally as impressive as a contrarian investor. After graduating from the University of Michigan and its law school, Zell went on to found Equity Group Investments (EGI) in the 1960s. By focusing on out of favor stocks in asset-intensive industries—such as real estate, energy, and media holdings—Zell has managed to profit handsomely over the years.
What Zell Is Known For
Real Estate, real estate and more real estate. The key to Zell’s fortune has been his ability to move against the crowd with regards to the commercial real estate sector. One of EGI’s first investments was buying office buildings and apartments in down markets back in the 1960s. These initial properties would later go on to form the backbone of publicly traded firms Equity Office Properties Trust and Equity Residential. The stocks would become some of the founding members of the real estate investment trusts (REITs) asset class in the 1990s.
Zell is equally a contrarian when it comes to finding market tops in the commercial real estate. He managed to sell Equity Office Properties to private equity group Blackstone for a whopping $39 billion- just before the real estate. By early 2009, most of the properties sold were “under water” or worth less than their mortgages. Zell has recently waded back into the commercial space, picking up the pieces of many failed buildings lost during the recession.
Zell has also applied his love of buying beaten down assets towards the media sector where he has recently purchased several marquee newspapers and radio stations.
Zell’s Words Of Wisdom
“All that matters in the end is the bottom line …”
“Sentimentality of an investment leads to lack of discipline”
“The process of the survival of the fittest will ultimately prevail …”
It’s true what they say, The Austrian School of Economics does think differently. Born in Switzerland and educated in Geneva and Zurich, Marc Faber developed his contrarian tendencies by working for White Weld & Company Limited, before he moved to Hong Kong in 1973 to work at Drexel Burnham Lambert Ltd. It was here that Faber developed his style of going against the herd to find big profits.
What Faber Is Known For
Many could see Faber’s brand of contrarianism as extreme pessimism. The fund manager has a knack for making wide sweeping bearish calls on the markets and various asset classes – usually as they are approaching their peaks. Faber correctly predicted the Black Monday crash in 1987, the bursting of the Japanese bubble, the Asian Financial crisis and more recently the Great Recession. These can be seen as the ultimate “not moving with the herd” calls.
While some of his latest predictions haven’t come true … yet, Faber has a huge cult following and publishes the monthly The Gloom, Boom & Doom Report. Faber also manages money through his Marc Faber Ltd advisor firm as well as serving as an advisor/director on several Asia-focused hedge funds including Leopard Capital and Asia Frontier Capital. The good doctor has also written several books and serves as a Forbes columnist.
Faber’s Words Of Wisdom
“Follow the course opposite to custom and you will almost always be right."
On the U.S. stimulus effort: “The only way to keep that money here at home is to spend it on prostitutes and beer, since these are the only products still produced in US. I’ve been doing my part."
“Buy a $100 U.S. bond and frame it to teach your children about inflation by watching the U.S. bond value diminish to almost nothing over the next 20 years.”
The Bottom Line
For us retail investors, we can learn some pretty valuable lessons from famous contrarian investors. While all their styles are different, the main overarching theme is that you shouldn’t go with the crowd. With the proper research, buying an out of favor stock, bond or other asset can lead to the bigger returns tomorrow. Whether it’s Buffett, Soros or Zell, all of these investors have used value investing in their respective industries to profit and prosper. Odds are you can’t “Break the Bank of England,” but you can improve your own returns by following contrarian investing principles.
If you’ve enjoyed this article, sign up for the free TraderHQ newsletter; we’ll send you similar content weekly.