Investing Commentary

You Are Not A Contrarian Investor, and You Don’t Know Squat

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GeniusAre you above average?

It’s been said 9 out of 10 investors believe they are above average stock pickers. I can’t back this statistic up with a reference to a rigorous scientific study, but I have often seen it quoted, and believe that it is true. Most people I know also believe they are good drivers, and having driven with many of them, trust me, they are not. It’s also the same thing as a person who claims to have perfect vision, as they squint profusely to read something at arm’s length, yet they refuse to make their life easier by getting their eyesight tested.  I can only conclude that this statistic is true, and we, the investors, wear rose colored glasses when it comes to our abilities.

I write this post after having a discussion this past weekend with a friend of mine who works on Wall Street. He has been involved in many aspects of finance, from investment banking and IPO’s to currency exchange and arbitrage. What I came away with from our conversation is that I know roughly nothing about stocks.

If anyone read my recently posted article on Seeking Alpha, 2 Dividend Plays for the Adventurous Investor, you would find mention of two risky dividend plays, FLY and AYR. These companies purchase commercial jets, then lease them to operators. It’s a complicated situation, and the success of the company relies on many factors, but of central importance is the structure of their debt versus the income of their leases, with a heavy dose of securitization, depreciation, and various other financial wizardry that was explained to me, but most of which went over my head.

I found his depth of knowledge on these companies incredibly interesting (especially FLY, which he had worked with extensively and done their IPO). He knew which debt came due when, and the interest rate. He knew how much they could subtract in depreciation, and where that would place their tax burden. He knew that the CEO loved scotch and has a wife named (insert name here – it took a few drinks to loosen him up). He also knew that at $3 a share back in 2008, FLY was way undervalued, and Wall Street was panicking their debtors would call in the loans, when he knew for a fact they wouldn’t. So he bought in, comforted by the 26% yield, and watched the stock appreciate 360% to $14.10, its current price.

FLY - Fly Airlines

This of course got me thinking. We all try to be contrarian investors, and many of us believe that we are. There’s no doubt that if you are intelligent, disciplined, and patient, (which I believe many of the wonderful bloggers I read are) you can buy companies at fair prices. But are we really contrarians? Did you buy Citigroup when it was trading at $1? That’s a contrarian investment. What about SuperValu, when it hit $7? Or Paychex at $21?

There’s nothing wrong with being safe and conservative when you invest. As Warren Buffet has famously said, “Rule #1 – Never Lose Money. Rule #2 – See Rule #1”. It’s how most of us dividend growth investors feel comfortable. And while we may never be the people who buy an ailing company with the hope it will return to previous heights, it wouldn’t hurt for us to evaluate our purchases with this criteria in mind.

So now that we know our competition has knowledge far greater than ourselves, and makes his moves long before we can, does this mean we should all just stop investing? I don’t think so. It was sobering to speak with someone who had so much knowledge, and so much advantage, over me. It made me realize there is so much more I could know about a company than I currently deem acceptable. Most Wall Street analysts focus on one industry, and generally 6-8 companies within that industry. They know these businesses inside and out. Do you know all of your holdings that well?

So the next time you think about purchasing a new stock, or even a little more of an older holding, take an honest look at how much you know about the company. Maybe hold off your purchase for a week or two, and re-read their annual and quarterly reports, plus analysts ratings, media articles, and even their news feed. Try to know as much about them as possible. Then, maybe one day, you’ll find a true contrarian investment.

I'm a dividend growth investor who is aiming to retire early in 5 years at the age of 45. My goal is to live off the income my dividend portfolio and rental property produce exclusively and leave the corporate rat race. I hope you will join me in this journey!


  1. I realize that I am a lousy stock picker and so have sought to develop a more mechanical and systematic approach to investing using stocks and options such that I react to the market rather than predict it. I have gotten to the point where I can invest without losing money. It is now a matter of whether or not I can actually make money over and above the market return. Still working on that one.

  2. Pig,

    Great post. I got PAYX at $27…but overall I definitely need to improve in this area! 🙂

    I’m interested in optionsdude’s method..sounds great.

  3. Good article, Div. Pig, but your ending takes for granted the fact that most of us will gain valuable knowledge by reading quarterly reports. Not so in my opinion. These reports are extremely complicated and provide very little “investable” info to the untrained eye. Most of the anual report is a marketing tool providing fun reading and “forward looking statements”. Over the past 20 years, my only “almost sure” strategy has been to buy good dividend paying stocks and hold them forever unless something drastic happens. i e Manulife.

    • @Michel – I understand what you mean when you say that some reports, especially annuals, are marketing tools. I read many reports that consist mostly of photos of vaguely happy people having fun. That doesn’t tell us much.

      But if you read many of these reports closely, there is tons of good information in them. You just need to cut through the BS for the real meat and potatoes.

  4. It reminds me of a story about a friend of my father who owned a public company. The story went that at a shareholder meeting, he was commended on how little his salary was when in fact, he owned a company that owned the public company for which much money was going to. Even though the official salary was low, he was getting paid handsomely.

    It just goes to show how company structure can be so complicated to navigate and it’s not always easy to follow the money.

  5. Buffet would also say that he would never invest in a company that he doesn’t understand. It could be the greatest value play available but if he doesn’t understand the way their business works he isn’t interested. I’ve tried to remember that but I don’t always dig as deep as I should. Good post.

  6. Nice post man. Totally agree.

    I must confess, I don’t think I’m a good stock picker. Rather, I simply buy and hold companies that are proven, established dividend payers. Sure, I do some analysis but the companies I own aren’t that hard to find nor understand.

    Will that simple strategy make me successful in the long run? Funny enough, I believe it will 😉

  7. Great article!

    I would agree with some of the comments above. I don’t find myself an “above average” stock picker…or even a “stock picker” in general. I generally find a company that is either fairly-valued or under-valued and commit money to that position. I don’t have $10,000 in excess capital laying around waiting for something bad to happen to a company and then I know exactly when to strike. I think that type of investing requires more time than I have available. I will say that I did purchase a handful of Transocean stock when the rig went down. I bought at right around $50 and I sold at $81. I honestly didn’t know what I was doing, and that was all lucky. Looking back on it, when the largest company in their industry is trading at less than 6 times earnings, there has to be some value. And they were insured against losses.

    I thought about SuperValu a few times when it was around $7. I just couldn’t bring myself to it with all the debt. Obviously, I could have made some money with that one.

    I say if you can’t sleep completely soundly at night, it’s not worth it. Anything can happen, even to the safest of companies. There could be an explosion at a Coke distribution center due to an electrical failure. There could be a large case of mad cow disease that affects McDonald’s beef. Anything can happen. But I feel safer with those odds than I do with contrarian investments. Money can definitely be made with those investments though, and probably a lot more than with safe dividend growth investments. I just think the disadvantages you so clearly spell out in the article are limited with investments like Johnson & Johnson…and maximized with investments like the jet leasing companies. Go with what you know.

    Take care Pig, and have a great weekend!

  8. I know I’m an amature investor. I’ve relied on pros for advise, but they’re results were amature. I realized I can and would rather lose my money my way rather then give someone else a percentage of my money they lost.
    My most sucessfull investments have been when I walk into a place and can see a company gearing up production but it hasn’t hit the street yet.
    The worse is when I think like a contrarian and bet on nothing.