When share prices fell sharply after the EU referendum, it was a reminder of how fear and panic can spread like wildfire through the stock market. In hindsight, that sudden price rout already looks like an trivial blip. Yet for many, it was a gut-wrenching moment of confusion when the outlook turned deeply uncertain. For others, though, it was a chance to pounce. It was a green light to contrarians who were fully signed up to Baron Rothschild’s advice that “the time to buy is when there's blood in the streets”. So what is it that separates contrarians from the stampeding masses?
On paper, contrarianism - or, going against the herd - is a simple and effective tactic in investing. But in practice it’s a discipline completely at odds with how most of us are wired up.
Following Warren Buffett’s advice of being greedy when others are fearful could have netted super gains in the weeks after the Brexit vote. Even more so if you’d been minded to buy shares when markets hit rock-bottom in the years after the dotcom crash (2003) and the financial crisis (2009). Back then stocks were deeply unpopular, leaving shattered investors nursing losses on the sidelines just as prices kicked off multi-year bull runs. But even in bullish conditions, some stocks and sectors fall well out of favour with the market - becoming no-go zones to all but the steeliest value hunters (banking shares since 2009 have been a good example).
Contrarian psychology
There are some very good reasons why investors find contrarianism such a tough ask. Evidence shows that when faced with what could be bad news for our investments, it’s much more instinctive to crawl under a rock.
One research study called The ostrich effect: Selective attention to information, looked at how often individuals logged into their investment accounts during times of good and bad news in the market. In periods when there was bad news around, people were less likely to view their accounts. But in periods of good news, they were much keener to login, presumably to bask in the glow of rising prices in their portfolios. It was evidence that the average investor naturally looks away in difficult conditions - quite the opposite from what a contrarian investor would do.
Against the herd
It’s easy to pick holes in instincts that are the culmination of several billion years…
