Going against the crowd typically triggers fear in people immediately. Why? Because everyone else is going with “A”, which makes them fear that they might be wrong in going with an alternative option “B”. They additionally may fear being embarrassed or appearing foolish if they go ahead with choice “B” and it turns out to be wrong.

“In investing, what is comfortable is rarely profitable,”  these great words by Robert Arnott, author, investor and founder of Research Affiliates, sums it all up about equity investments. As investors it is very comforting to be with the majority of the market as being wrong is more painful when you are alone and that’s the reason herd mentality is widely prevalent in equity investing.

We’re hard-wired to herd. In a new place, most people tend to choose a busy restaurant over an empty restaurant. While some may be rationally concluding that the busier restaurant probably has better food (which may or may not be true) many are just basing their decision on the choice of others. There is a very likely scenario that a person who visits the less crowded restaurant experiences a faster service and better quality of food. These people in investing world are known “Contrarians”.

Not against but different from the mentality crowds

Contrarians investors are not those who buy companies which is sold by everyone and sell those which are bought by everyone. It may be the outcome, but not the thought. Contrarians investors take non-consensus positions and wait for rest of the market to recognize the true potential of the investments.

The crowd is not wrong all the time and contrarian investors will always look for opportunities created by excesses in the market. As said by Humphrey B Neill, author of The Art of Contrary Thinking – The public is often right during the trends, but wrong at both ends.  This is the precise point on which contrarian investors try to capitalize on and wait. A contrarian investor understands and identifies the areas in the market where the crowd has overreacted, resists the temptation to go with the flow and builds a different portfolio than the trend and ultimately tends to benefit when the market realizes its excesses. 

Past is not Equal to Future

Majority in crowd believes companies, sectors and themes which have done well in recent past will continue to do well and those which had tough times in past will continue to struggle. Investors extrapolate the recent trends into the future and often ignore the reversal to mean. This imitation leads to excesses which creates opportunities for arbitrageurs and contrarians. 

Not everything which is falling is contrarian opportunities. To understand if the market prices are irrational in either direction, the contrarian investor must have framework to identify Businesses which have high entry barriers and strong moat which makes business a right to win, sectors which are not fragmenting and understanding the intrinsic value of the business which offers a great margin of safety.

Building a Contrarian Portfolio

“Markets can remain irrational for longer than one can remain solvent.” – Contrarian investor who is constructing the different portfolio than the market needs know what to buy, when to buy and most important how much to buy? A balanced approach can be to start to building the position when the company is in the problem, increasing the weight when headwinds are turning into the tailwind and waiting for the rest of the market to realize the true potential. The contrarian investor too wants the crowd to join him ultimately, to enable him to gain from the investment.

Click here to check out ICICI Prudential’s Contra PMS.

While a contrarian investing strategy looks simple i.e. buying low and selling high, it has its own challenges of identifying changing trends, sector positioning, companies with leadership traits and margin of safety.

A contrarian strategy aims to capitalise on inefficiencies in the market and take advantage of mispricing opportunities. Here, you may want to focus on companies or sectors where sentiments are not favourable. It aims to invest in companies which have not been the flavour of the market but are expected to do well in the long run. You could invest in sectors where entry barriers are high or sectors that are in consolidation or companies in special situation. For example, you may have a sector that has been completely ignored by the market, given its past, yet if one is able to identify the right trigger for the company or sector such investments have the potential to unlock significant value. 

So at all points of times there would be some opportunity or the other from the market through which such a strategy could benefit over the long term. Thus, it can be termed as a strategy that aims to generate alpha in all types of economic and market environments.

We, at ICICI Prudential Alternative Investments, are aware that a contrarian investment process is subjective. So what one person may infer as contrarian opportunity, based on their research and analysis, may not necessarily be viewed as that by others. So while the method for identifying companies or contrarian opportunities may be different for each one, we aim to back our high conviction ideas through concentrated portfolios and sizing, which is basically the weightage allocated to stocks.  

To summarize, to succeed as a contrarian you must recognize what the crowd believes, have concrete justification for why the majority is wrong, and have the patience and conviction to stick with what is, by definition, an unpopular bet.

The views expressed by the author are his own and not specifically those of the AMC or its management.

Investor’s may invest with us directly as well. 

Risk Factors & Disclaimers

  • Investing in securities including equities and derivatives involves certain risks and considerations associated generally with making investments in securities. The value of the portfolio investments may be affected generally by factors affecting financial markets, such as price and volume, volatility in interest rates, currency exchange rates, changes in regulatory and administrative policies of the Government or any other appropriate authority (including tax laws) or other political and economic developments. Consequently, there can be no assurance that the objective of the Portfolio would achieve. Prospective investors are advised to carefully review the Disclosure Document, Client Agreement, and other related documents carefully and in its entirety and consult their legal, tax and financial advisors to determine possible legal, tax and financial or any other consequences of investing under this Portfolio, before making an investment decision. 
  • The Stock(s)/Sector(s) mentioned in this material are only for the purpose of explaining strategy of the Portfolio Manager and do not constitute any recommendation /opinion/advise of the same and the portfolios may or may not have any future positions in these Stock(s)/Sector(s). The composition of the portfolio is subject to changes within the provisions of the disclosure document. The benchmark of the portfolios can be changed from time to time in the future. Trading volumes, settlement periods and transfer procedures may restrict the liquidity of investments in portfolios. Different segments of the Indian financial markets have different settlement periods and such periods may be extended significantly by unforeseen circumstances. Further, the selection of the stocks in the particular portfolio would depend on various factors like timing of entry and exit of the client, market conditions at time of transactions. 
  • Individual returns of Clients for a particular portfolio type may vary significantly from the data on performance of the portfolios as may be depicted. This is due to factors such as timing of entry and exit, timing of additional flows and redemptions, individual client mandates, specific portfolio construction characteristics or structural parameters, which may have a bearing on individual portfolio performance. No claims may be made or entertained for any variances between the performance depictions and individual portfolio performance. Neither the Portfolio Manager nor its Directors, Employees or Sponsors shall be in any way liable for any variations noticed in the returns of individual portfolios. 
  • The Client shall not make any claim against the Portfolio Manager against any losses (notional or real) or against any loss of opportunity for gain under various PMS Strategies, on account of or arising out of such circumstance/ change in market condition or for any other reason which may specifically affect a particular sector or security. The Portfolio Manager shall have the sole and absolute discretion to invest in respect of the Client’s account in any type of security subject to the Agreement and as stated in the Disclosure Document and make such changes in the investments and invest some or all of the Client’s investment amount in such manner and in such markets as it deems fit would benefit the Client. The Portfolio Manager’s decision (taken in good faith) in deployment of the Clients’ account is absolute and final and can never be called in question or be open to review at any time during the currency of the agreement or any time thereafter except on the ground of malafide, fraud, conflict of interest or gross negligence. This right of the Portfolio Manager shall be exercised strictly in accordance with the relevant Acts, rules and regulations, guidelines and notifications in force from time to time. 
  • All data/information used in the preparation of this material is dated and may or may not be relevant any time after the issuance of this material. The Portfolio Manager/ the AMC take no responsibility of updating any data/information in this material from time to time. The Portfolio Manager and the AMC (including its affiliates), and any of its officers directors, personnel and employees, shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner.

ICICI Prudential Asset Management Company Limited is registered with SEBI as a Portfolio Manager vide registration number INP000000373.