Never too soon to become a contrarian

Benj Gallander and Ben Stadelmann
Friday, December 2, 2005

It happens like this. One day you’re studying the annual report of a company that nobody remembers or otherwise ridicules, and it’s official: you’re a contrarian investor. Committed to this method for a solid length of time, you likely have achieved a high level of investment success.

The natural consequence of your active mind is to reflect on how this all came to be. After all, it’s harder to be a contrarian than a conformist; harder to tame the emotional beasts that lash out when going against popular opinion. No wonder most contrarians guard their independence and revel in their ability to “think outside the box.”

For one gent, reflection brought him back to his last year of high school, where the cornerstone for his contrarian foundation was laid.

“Math of investment” was the subject, and for the school year the class was to participate in a citywide stock portfolio challenge. Each team received a hypothetical sum for trading stocks on the Toronto Stock Exchange.

Gord, a friend of the contrarian, hoped they would be on the same team, but he was unhappily forced to join another squad. Not to worry, assured David, the suddenly self-appointed leader of Gord’s team. They already had a lock on class best, and looked good to whip the whole city, for his mother was a stockbroker on Bay Street and she would create and manage their portfolio. It was a lock!

After the first month, David and Gord’s woebegone team was mired in last place, never to escape. Gord’s profane belittling of David and his broker/mother became a great source of class amusement.

How could someone who picked stocks for a living be outperformed by a group of unruly high schoolers? Obviously, the short time frame could have been a factor, and the “play” money at stake was unlikely to solicit her best efforts.

But the result did plant the seed of skepticism in the would-be contrarian’s mind. Might the professional advantage be illusory? Perhaps the motivated, informed individual investor could do better?

But what of the contrarian’s team? Convinced of David’s familial advantage, it obtained (through surreptitious means) a copy of David’s portfolio, and its choices of blue-chip household names was mimicked. Not surprisingly, the contrarian’s team joined David’s in the cellar.

At the halfway point, the team became completely apathetic. Most retail investors experience this at some point; just ask Jim Cramer of CNBC’s Mad Money why he’s always yelling!

But then the contrarian proposed a bold idea: sell everything and put the proceeds into a single stock that he followed closely and thought had been undervalued for some time. The stock was Maple Leaf Gardens Ltd.

The idea was voted down as being way too radical. Soon afterward, the stock began a great run that would have lifted the team way up in the standings, far better than anything the underlying hockey franchise could have imagined.

The high schooler learned many lessons. A strong distrust in so-called “safe” stocks or blue chips was forged in the contrarian fires that year. Those large-cap companies were often fully valued with a probability of going down, and though the risk was seemingly constrained, so too was the opportunity for reward.

Regret is the consequence of not following through on an opportunity like the one with MLG. Investing by consensus is a recipe for mediocrity. Buying simply because you have disposable cash — real or imaginary — and thinking that any day is a good day to buy stocks is poppycock. Random walkers can take a hike.

And a game on paper is not the same as plunking real money on the table.