The folks at Citi have some sage, highly researched advice for the contrarians among us: give up. The strategy of buying what is unpopular and unloved – and selling what is hot – has been labeled fruitless by the investment bank.
As the AFR reported earlier this week, the number crunchers have proved that being contrarian doesn’t work – last year a contrarian strategy would have produced a loss of 34% and just two of the past 18 years were deemed successful for the outsiders.
I don’t mind saying I’m a contrarian. In fact, all the analysts at II are contrarians to varying degrees. What to make of these numbers, then? There are two immediate criticisms of Citi’s approach.
Firstly, what Citi deems ‘contrarian’ is suspect. It assumes contrarian investors bought the most bearish assets and sold the most bullish. In other words, it labels us all as blindly going against the grain. Being contrarian means investigating what others aren’t – it is not a call to passively buy something simply because others are selling it. A blind contrarian is a fool; a discriminating contrarian is what we should aim to be.
Secondly, just spend a moment to think about the implication of Citi’s conclusion. It means the best way to make money is to buy what’s hot and to sell what is not – a momentum strategy. In essence, this means doing the same thing as everyone else is doing. Citi is implying that investors can do the same thing as everyone else and expect better results.
The entire argument utilises a tool that smart investors seek to exploit: the blind application of numerical data to come to decisive, specific conclusions. This may well be a contrarian indicator for contrarians.