Being a contrarian investor is a lot harder than it sounds. It means doing the opposite of the crowd. It means having the stomach and stamina to buy assets or investments that are unloved, misunderstood, and trading at bargain prices.
Continue Reading Below
Highly respected investors who made their fortunes by being contrarians include David Dreman, Sir John Templeton, Sam Zell, and Warren Buffett. Moreover, emulating the success of famous contrarians is proven strategy that works in any market climate.
First, being a contrarian is often associated with being a “value investor.” And by definition, value investors (VV) actively seek investments that are undervalued, with the purpose of buying them below their intrinsic value. The payoff comes after financial markets belatedly recognize the incredible value of these investments and begins to reward them by lifting prices.
Although contrarians and value investors are closely associated with each other, even investors that don’t fit the strict mold of being value oriented can be contrarians.
Continue Reading Below
For example, investments that experience sharp reversals or are temporarily out-of-favor, but not necessarily deep value investments, may offer the contrarian investor a great opportunity to pounce. This was exactly the case with iShares MSCI Brazil ETF (EWZ) earlier this year.
Before revelations of Michel Temer’s (Brazil’s president) political crisis, EWZ had gained over 21% in 2017. But after Temer’s crisis went public, EWZ crashed around 15% in just a matter of days. This offered contrarian investors a unique opportunity to acquire exposure to Brazilian stocks at fire-sale prices.
Via ETFguide PREMIUM and Weekly Picks we wrote the following on May 24, 2017:
“We’re buying the iShares MSCI Brazil ETF (EWZ) at current prices near $35.40 up to a buy limit of $35.75. For now, we’re steering clear of 2x or 3x bull Brazil ETFs until a verifiable uptrend is re-established. Brazil continues to be among our top contrarian trades and our last trade in Brazilian stocks via ticker BRZU from our 4/19/17 Weekly Picks ended with an 8% gain. (Thankfully, we bailed on BRZU just before it crashed.)
Fundamentally speaking, car production, oil exports, and agriculture improvements during the first few months of 2017 are a clear signal that Brazil’s economic recovery is still intact. Nevertheless, the ugly political climate has temporarily overshadowed the country’s economic rebound and therein lays the opportunity.”
Shown above is the chart of EWZ versus the Vanguard FTSE Emerging Markets ETF (VWO). As you can see, since our EWZ buy alert, Brazilian stocks have significantly outperformed broader emerging stocks with a +22.13% gain compared to a rise of just +10.92% for broader emerging markets.*
Our still open EWZ position is a textbook example of a contrarian trade. Moreover, it provides very strong evidence that contrarian investing can indeed deliver market beating returns even during short-term time frames. Lastly, contrarians do not need to be strict value investors in order to profit from the strategy.
*Performance figures through the market close of 9/21/17