To invest successfully, various strategies can be applied. One of them involves going against the prevailing trend.

The problem of inflation in 2022 goes beyond a continuous rise in prices. Understanding how to make safe investments in a high-inflation environment is crucial. One widely contemplated strategy for safeguarding against inflation is investing against the prevailing trend. This strategy is often called a contrarian strategy. There are several things traders can do to apply this strategy including:

  • Focusing on Utilities: Essential needs like foods will never wither under inflation
  • Buy the Unloved: Buying instruments that other traders avoid
  • Avoid emerging markets: Invest in Japan instead

contrarian trading

 

Contrarian Investment Strategy

Every year, various investment firms release predictions regarding the top contrarian investments for the upcoming 12 months. An investor who adopts this strategy is called a "Contrarian." Overall, there are three contrarian investment strategies that you should be aware of.

 

1. Shifting Focus to Utilities Instead of Crude Oil

In their contrarian investment report for 2021, Citi, a US investment bank, shared optimistic predictions for the energy sector and recommended Exxon Mobil and BP plc, oil companies, as top choices. These predictions proved accurate, with Exxon and BP stocks generating gains of around 48 percent and 30 percent, respectively, for the year.

However, in their contrarian investment report for 2022, Citi changed their strategy and advised investors to redirect their attention towards the utility sector rather than the energy sector. This adjustment was based on their prediction of an economic slowdown in 2022, which would favor the utility sector and consumer staples over energy sectors like crude oil.

Consumers prioritize essential needs such as food, housing, and utilities during rising inflation and deteriorating economic conditions. Consequently, Citi suggests that investors consider utility sector investments while avoiding European luxury goods sectors. In an economic downturn, consumers will likely reduce spending on expensive items.

 

2. "Buy the Unloved"

For nearly 30 years, Morningstar has published an annual report called "Buy the Unloved." This report examines investment funds considered overlooked by market participants and seen as contrarian investment opportunities. Morningstar also compares the final performance statistics of the "unloved" group with the "loved" group.

Interestingly, there are profits to be made by investing in funds that others consider unattractive. Over the past ten years, the "unloved" fund group generated a profit of 13.6 percent, while the "loved" group yielded only 8.3 percent. Moreover, during the past year, the "unloved" group recorded significantly higher returns than the "loved" group.

However, Morningstar advises investors to purchase the unloved funds at a low price and not make it their core strategy. Instead, investors should adopt a disciplined, long-term approach to diversify their stock portfolios.

 

3. Avoiding Emerging Markets

Currently, some analysts predict a potential rebound in struggling Chinese stocks. However, some market participants argue that it is still premature to make purchases. Patrik Schowitz from JPMorgan Asset Management has stated that his major contrarian bet is to refrain from rushing into emerging markets, including China.

The bleak economic outlook influences this cautious approach in China, as the country is still recovering from the pandemic's impact. Moreover, the likelihood of stricter government regulations in China adds to the concerns. These factors pose a challenge for investors in identifying stocks worthy of investment.

While many view emerging markets as promising investment destinations, Schowitz believes Japan offers better investment prospects. He expressed, "We like Japan. I don't think many people like Japan. We think it looks cheap." Therefore, focusing on Japan can be a contrarian investment strategy that merits consideration.

 

Illustrations of Applying the Contrarian Investment Strategy

One of the widely discussed success stories of implementing the contrarian investment strategy is that of Michael Burry, the founder of Scion Capital hedge fund. He effectively shorted the housing market before the 2007-2008 financial crisis.

Years before the housing bubble burst, Burry initiated short positions in Subprime-Mortgage bonds. During that time, the real estate market was experiencing significant growth, leading many to view his strategy as a mistake. Burry faced substantial ridicule during this period.

However, Burry's research proved to be remarkably accurate. The housing market eventually collapsed, validating the success of his contrarian approach to investment. The hedge fund he managed generated profits surpassing $700 million for investors and $100 million for himself.

Over the period from November 1, 2000, to June 30, 2008, Scion Capital achieved a net profit of 489 percent, while the S&P 500 yielded a mere 2 percent in comparison.

Burry's notable achievement, captured in the book and film "The Big Short," highlights several key elements of investing against the prevailing trend, including:

  • Investors need to defy market trends and widespread consensus to identify profitable investments.
  • Typically, they adopt a bullish stance when others are bearish and a bearish stance when others are bullish.
  • Investing against the trend entails purchasing assets that others are selling and selling assets that others are buying.
  • Contrarian investors actively seek undervalued stocks that are available at low prices.
  • Investing against the trend is often linked to value investing and the principles of fundamental analysis.
  • The guiding principle of investing against the trend is: "Buy low, sell high."

 

Why Inflation Has Become a Serious Issue

In the United States, the inflation rate has reached its highest point in the past 40 years. Numerous factors contribute to the price surge associated with the global pandemic, including supply disruptions and the money supply increase. This is a consequence of trillions of dollars injected into the economy by the government.

The inflation problem is further expected to worsen due to the conflict in Ukraine and the rise in oil prices. As a result, many individuals feel that merely safeguarding the value of their assets against the erosion of purchasing power is inadequate. Consequently, they actively seek potential investment opportunities that may not be accessible to others.

In such circumstances, numerous investors recognize the advantages of contrarian investing. This strategy, employed by successful investors like Warren Buffett, Charlie Munger, Sir John Templeton, and Michael Burry, aims to uncover hidden investment prospects in the market.

 

Conclusion

Implementing contrarian strategies may offer a potential solution to address the current inflationary conditions. Nevertheless, it is crucial to remember that such strategies entail high risks and demand a patient, long-term approach. Exercising additional patience and vigilant observation is essential to identifying precise opportunities. Experts at Citi have indicated that the success rate of contrarian strategies over a 26-year timeframe is notably low.

 

Every trader and businessman has their strategy against inflation, billionaires included. What kind of tips do billionaires use to protect their assets against inflation?