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The Power of Contrarianism to Long-Term Investment Success

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Written by: Scott Barlow

Warren Buffet is widely regarded as the most successful investor ever. His investment prowess and success is the stuff of legend.

Yet in 1999/2000 investors in his investment company Berkshire Hathaway (chart below – blue line) lost over -60% of their investment! Additionally, an investment in Berkshire Hathaway lagged an investment in the stock market (S&P500, red line) by -44% at its worst point.

Despite experiencing the loneliness and huge discomfort of massively underperforming the benchmark indices, Buffett didn’t flinch and came back stronger than ever.

Our capital is underutilised now,” Buffett said. “It’s a painful condition to be in, but not as painful as doing something stupid.

Buffett is also famous for saying that to succeed in investing, you need to be greedy (buy) when everyone else is fearful (selling) and fearful (selling) when everyone else is greedy (buying). In this statement, Buffett reflects how well he understands the power of contrarianism to long-term investment success. But his experience should serve also to remind investors that such a stance can be painful and lonely because it is not possible to know how long market extremes may last, leaving the investor looking like a dill far longer than they might ever imagine.

Most retirement savers it appears cannot stomach feeling like a dill.

Numerous studies show they almost permanently underperform a simple ‘index strategy‘ indicating that far from enduring the pain and discomfort, they capitulate to their fear of missing out, buying investments after they’ve already risen and they capitulate to their fear of losing more, selling investments after they’ve already fallen.

This pattern of repeatedly buying high and selling low causes the under-performance. It is the exact opposite of what we each intuitively know to be a basic tenet of successful investing – buy low, sell high.

This is why a financial planner with a sound investment philosophy is worth every cent they’re paid and why a poor financial planner – one who is not applying a sound valuation methodology – can be disastrous to your long-term wealth creation.

Outcomes-based financial planners stop investors capitulating to their greed and fear, whilst mainstream financial planners, with no value mechanism, consistently end up helping their panicky and insistent clients into ill-timed capitulation.

Poor planners and unsophisticated investors, left to their own devices, chase winners.

They switch from poor performing managers into recently high performing ones, with no reference to the managers underlying investment philosophy.

Related: Three Unique 401(k) “Hacks” for National 401(k) Day

They buy rallying markets and sell falling markets, whilst not embracing a momentum strategy that might give validity to such behaviour.

Buffett consistently measures and validates his performance over years and decades, not weeks or months as most investors are inclined to do.

When investors come to a financial planner to devise a strategy to achieve a long-term goal (e.g. retirement planning) but who subsequently ‘benchmark’ the value of their planner’s investment advice on short-term results not only frustrate their planner but they more often than not begin a slippery slope to dissatisfaction and financial oblivion if left unchecked.

Regrettably, this behaviour is encouraged by the investment and planning industry’s infatuation with short-term results. The inordinate focus and adulation on daily, weekly and monthly performance-results creates a speculative rather than investment mentality amongst investors.

Warren Buffett is understandably the investors ‘benchmark’. Everyone would like to say they invest with the prowess and discipline of Warren Buffet and yet, most investors don’t even come close.

Through his famous annual reports stretching over 40-years, Warren Buffet has consistently and persistently made it very clear that to be a successful investor you must:

  • Apply a value mechanism – only buy when investments are cheap; sell when investments are expensive
  • Judge the rigour of your strategy over multiple decades (not a few short years)
  • Implement a sound philosophy and stick to it no matter what
  • Measure performance over a time frame that is consistent with your investment horizon

Instead, most investors:

  • Rely on the advice of financial planners who have no value mechanism for determining when investments move from ‘cheap’ to ‘expensive’ at any point in the investment cycle
  • Choose fund managers and investments based upon recent performance, with no regard to any philosophy defining cheap versus expensive
  • Give in to their fear of missing out and enter a fund or investment after it has already had a good run; buying into markets that have already risen
  • Give in to their fear of losing more and exit their investment funds after a bad run; selling into markets that have already fallen

Regrettably, much of the investment and financial planning industries do very little to discourage such behaviour.

Thus investors abandon Buffett’s proven path to wealth creation at the dreadful cost of their retirement dreams.

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