It Pays to be Contrarian

The FT's Fox column has just published the fascinating results of its contrarian research for the first half of the year. It identified the investment strategies of major investment banks from their published research, then assumed adoption of trading strategies directly contrary to that advice.

The banks predicted a hard time for US and Japanese government bonds; so instead Fox bought them, achieving a 10 per cent gain on its Treasuries and one in double digits for its Japanese securities.

The banks' currency strategists were bullish on the euro and bearish on the yen; Fox's short euro/dollar and long yen/dollar trades "were two of our best, yielding about 20 per cent."

Equities also "provided some good opportunities. Just as no one expected the Mongolian, Bangladeshi and Sri Lankan benchmarks to finish on the winners' podium, few anticipated that last autumn's correction in Chinese stocks would turn into a rout… Shorting mainland shares listed in Hong Kong returned 16 per cent."

Fox comments gleefully that in general "the advice was reassuringly poor. The markets continue to reward us for listening to the experts - then doing the opposite."

David Fuller's view I hope more readers will find this reassuring rather than worrying. Analysis can be an arrogant profession and it is often biased. As investors, it is interesting to follow the analytical debate but to be wary of a clear consensus which is usually a contrary indicator. A widely held consensus market view is a far better indicator of what people have already done, rather than of what the market will actually do.

All market views, not least one's own, should constantly be reviewed against the reality of price trend action. If we fail to do this, we are relying on faith-based analysis.