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What Is A True Contrarian?

|Includes:Apple Inc. (AAPL), GS

Does the word "contrarian" really mean anything anymore? If a large consensus says that U.S. stocks in the aggregate are overvalued, then I guess if you go long an S&P Index Fund, you are in some sense a contrarian, even though buying an index fund and holding it for years is the ultimate in conventional passive investing.

What about someone who has a so-called hedge fund that, for lack of a simple label or pigeon-hole, is called a "flexible, multi-cap long/short opportunistic" hedge fund?

First of all, the term "hedge fund" tells us very little.  I once ran a "for-sophisticated-investors-with-high-net-worth-only" pooled investment fund that went long stocks only and held them for a long time. I hedged nothing.

Yet investment consultants and their clients insist on labels, so my fund got labeled an opportunistic, long/short hedge fund.  There is also the problem that, if you deviate from how the consultants label you, you can lose the engagement because of "style drift."  If you pop a big fat gain like John Paulson did when he bet on a collapse of the sub-prime market, and when asked, "how did you know?" I would be hiring the manager who struggles for words and can't quite tell you how he knew and then finally says "I felt it strongly in my gut."  Despite reams of empirical data that Paulson & Co., no doubt perused, it came down to what you feel in your gut and acting on that gut instinct. 

I'm guessing nobody fired John Paulson for "style drift."  

In my view, anyone who uses the label contrarian is just as blindly succumbing to labels as are the investment consultants and institutional investors who employ them.

And frankly, I wish we would all stop using the term "hedge fund" and start using the term "private investment fund." Neither the term "contrarian" nor "hedge fund" is a true reflection of what good investors and traders really do.

Yes, smart investors may have discovered over time that crowd behavior when it comes to investing can and often does lead to exploitable mispricing in securities markets.  But I would never invest in a "contrary" way just to be a contrarian.  I will only do so if I believe that I can profit by investing in securities where the conventional wisdom seems to be wrong.  

I am not short Apple (NASDAQ:AAPL) because I have no sense that the widespread positive conventional wisdom about the company is wrong.  Indeed I wish I had played the long side of this stock that great day years ago when Steve Jobs came back to the company.  AAPL has the numbers to support the favorable view of the company.
Ditto Goldman Sachs (NYSE:GS).

And yes, sentiment indicators and size of the short interest may be good information to use when taking a contrary position on a stock, bond, commodity, or derivative.  But sometimes it's just this simple:  "the the trend is your friend."

At the end of the day, the only thing that counts when you are running money, either your own or others, is your total return after taxes and inflation.  Period.

 



Disclosure: Author has no positions in AAPL or GS
Stocks: AAPL, GS