Contrarian Investing Opportunities

Contrarian investing is not for the faint-hearted, but it’s what made George Soros rich so there must be something in it. Basically, a contrarian investor takes the view that there’s always a good chance that the markets will over-react to any piece of news, for better or worse, and that somebody with his eye firmly fixed on the fundamentals can profit from the short-sighted herd instincts of other people. Contrarian opportunities don’t occur very often, but they’re almost always profitable when they do.

Many contrarians spend their lives staring at charts, hoping
to determine the exact moment when a particular uptrend or downtrend has gone sufficiently far to be out of kilter with the actual situation. That’s when they’ll move in with a bold intervention.

Contrarian Investing Opportunities And Genetically Modified Crops

What would a contrarian be saying now? He’d probably say: ‘All this panic about genetically modified crops has gone much too far, and things are going to turn round once some really useful products start to hit the market. Dupont is a steal at 19 times earnings’. Or: ‘General Motors at 8 times earnings? That company’s going to be around for a long time. Sell me some, now.’

A quiet word in your ear might be in order, however. Don’t judge everything on those tempting p/e ratios alone. You need to remember that a p/e is calculated by dividing today’s stock price by the last reported profit-per-share figure - and that might have been six months ago. If the company’s trading performance really has taken a dive since the figures were published, it’s possible that you might be looking at an unnaturally optimistic ratio.

And so to the biggest contrarian of them all - not that he’d thank us for describing him in those terms. Warren Buffett, the fabled ‘Sage of Omaha’, has made the greatest of his many fortunes by looking out continuously for large and profitable companies that have fallen out of favour with the markets, and then buying them to hold indefinitely. (It takes a lot of bad news to make Buffett sell anything, which is why he doesn’t quite fit the wheeler-dealer image of the typical contrarian.) And suddenly he’s back in the news.

Contrarian Investing Opportunities & Mr Buffett

Mr Buffett, in case you haven’t heard of him, runs an investment company called Berkshire Hathaway, which commands the highest share price in America - $69,400 at the time of writing (although his tradeable B shares can be had for a mere $2,300 each). Indeed, so high are these prices that he’s been specifically excluded from the Dow Jones Industrial Index, which normally computes all its rankings on the basis of crude stock prices.

Berkshire Hathaway doesn’t like new technology, and it doesn’t approve of high p/es. Instead, it says, it looks out for solid old-fashioned dividends in its invested companies - remember those? So why does the fund itself trade on a p/e of 56? Because Buffett’s been right for so long that his shares have become a kind of refuge currency that people tend to fight over every time that the rest of the stock market stumbles.

Contrarian Investing Opportunities & Mr Buffett

So, predictably, Mr Buffett is now the flavour of the season in an America that’s becoming more cautious by the day. In the 12 months since the first dot.com crashes occurred last March, Berkshire Hathaway’s B shares have put on more than 50 per cent - thus sweeping away nearly all of the damage that it suffered in 1998/99 when the ‘irrational’ technology boom was at its height. Expect to see the company breaching its all-time high this summer - especially if President Bush’s consumer boom becomes a reality.

You could do worse than follow Buffett’s own thinking. And the good news is that you don’t need $2,300 per share to do it. There are literally hundreds of internet sites that aim to help you apply the Sage’s investing principles to your own portfolio (try Warren Buffett Links at http://buffett.20m.com or better still, read the great man’s famous Letters to Investors at the Berkshire Hathaway site (http://www. berkshirehathaway.com). There’s more wisdom there than most investors will ever possess. And most of it is long-term stuff. Just what you need, really, in a year when the short-term indicators are all over the place.