Contrarian investing tends to have a certain mystique to it. If you make an ordinary search on Google for famous investing quotes, more often than not you will stumble upon the sayings of successful investors who made a fortune by betting against the herd.
Because of this, it has always been “cool” to be a contrarian and there is no shortage of financial media commentators who will tell you that betting against the “stupid herd” is the best thing you can do with your money. But looking at the hard numbers, we come to a very different conclusion.
On average, contrarians tend to be wrong a vast majority of times and taking contrarian advice at face value can have devastating consequences for your investment portfolio. This is summarized nicely in the following chart.
Figure 1: Performance of simple contrarian strategies since 1998
If you simply followed the advice of contrarians every single time for the past 17 years, you would have lost 90% of your money in the process. But, if listening to contrarians tends to make you poor, why are commentators like Marc Faber and Jim Rogers so popular in the first place?
The answer to this is simple; although contrarian investing is wrong the vast majority of time, the rare moments when contrarian bets actually pan out, they tend to perform spectacularly (see Figure 1). The bursting of the Dot-com bubble and the financial crisis of 2008-2009 are nice examples of this. Yet, one should not be tempted by these occasional outsized gains, as following “the stupid herd” tends to perform much better on the long run.
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Simon is the CEO and Editor-in-Chief of Foresight Investor. He has been following the markets passionately for over 7 years.