A Good Year for Contrarians Gets Even Better

“Think different,” urges the ad campaign for a certain personal computer company.

This has been a choice year to do exactly that in financial markets.

True contrarians--investors who focus on doing the opposite of what most investors appear to be doing with their money--have been handed a host of great opportunities this year, thanks to global markets’ manic mood swings.

Last April 21, for example, the big market news was the astounding run-up in stocks of tiny companies that had some link--any link, really--to the Internet.


On that day, shares of 7th Level Inc., a start-up company that produces animation software for Web sites, rocketed 411%, gaining $7.44 to close at $9.25 a share on Nasdaq. Thus, in six hours, 7th Level enjoyed the same price gain that took the Dow Jones industrial average 12 years to grind out.

A contrarian could easily have viewed that widespread nuttiness over marginal Net-related stocks as a powerful signal that the market overall was in a speculative “blowoff"--the end of a bullish phase rather than the start of one.

It would have been a brilliant call: April 21 was the very day of the peak in the Russell 2,000 index of smaller stocks. The next day, the index began the long decline that took it down 37% to its recent low reached on Oct. 8.

April 21 wouldn’t have been a bad day to take some profits in blue-chip stocks, either: The Dow closed at 9,184.94 that day. The index would gain only 1.7% between then and its ultimate peak of 9,337.97 on July 17, before the harrowing late-summer plunge.


As for 7th Level: It’s back to $2.34 a share.

Of course, in retrospect it’s easy to say that market signals were obvious. In the heat of the moment, however, clarity is often lacking. It takes great courage to be a true contrarian and go against the tide.

What’s more, the tide sometimes can be far more powerful, and long-lasting, than even the savviest contrarians can imagine. Asia is a good case in point: Over the last 15 months, a contrarian might have been tempted several times to declare that Asian markets had bottomed. Each call, except perhaps for the last one (we’ll see) would have been far too early.

Still, the last few months of wild market turmoil have brought contrarians some terrific opportunities to fight the crowd and win.


During the first week of October, when it seemed that the only thing investors wanted to own were U.S. Treasuries, a reasonable contrarian bet was that the crowd’s mood had become absurdly dark. If the world wasn’t ending, then the plunge in 30-year Treasury bond yields from 5.26% on Sept. 15 to a record-low 4.72% on Oct. 5 looked overdone.

With last Friday’s surprising report on third-quarter economic growth--it estimated that U.S. gross domestic product grew at a real annualized rate of 3.3%, far above most forecasts--the end of the world indeed appears to have been postponed. Which helped send the 30-year T-bond yield back to 5.15% by Friday.

Similarly, the collapse in shares of Merrill Lynch & Co., the nation’s largest brokerage, from $59 on Sept. 15 to just under $36 on Oct. 7--amid deepening worries over financial-market losses--had the scent of a classic selling panic rooted in raw fear rather than in a studied assessment of the fundamentals. By last Friday, Merrill stock was back to $59--a 64% gain for any contrarian who snapped up shares at $36.

Whether that gain will hold, or whether Merrill and other rebounding financial stocks will follow the Asian-market pattern by heading into a new downward spiral soon, remains to be seen.


Which offers a reminder that contrarianism often is best used as a portfolio enhancer. In other words, you make contrarian bets with a small portion of your money, rather than betting the ranch.

Indeed, being contrarian doesn’t mean you have to change your view of the long-term prospects of your core investment holdings. Just the opposite: By keeping your mood and outlook on an even keel, you’re better positioned to cash in on the short-term mood swings of others less sure of themselves.

What would a true contrarian be thinking today? Probably that assumptions about weak economic growth in 1999 are overblown.

The third-quarter GDP report, strong as it was, doesn’t assure an economic boom in ’99, of course. Business spending was extremely weak in the quarter, and exports fell at a 2.9% annualized rate. The end of the General Motors Corp. strike led to a rebuilding of inventory by GM, a nonrecurring economic boost.


But the key to the quarter’s growth was U.S. consumer spending: With real incomes still growing at a strong pace and with jobs still relatively plentiful, Americans can’t seem to be cowed into slowing their spending--not even by what supposedly is the worst global financial crisis in decades.

“Give U.S. consumers a buck and they’ll spend at least a buck,” says James Annable, economist at First Chicago NBD bank in Chicago. Despite recent reports that consumer confidence is waning, Annable thinks Americans are saying one thing--that of course they’re concerned about the economy--while doing another, which is spending money at a brisk pace because they can’t really find a good personal reason to cut back.

If that trend holds, and if the recent market stability in Asia is sustained, the contrarian bet might be that bonds--still favored by many nervous investors--will in the short run be shunted aside in favor of a surprisingly powerful new bull rush into U.S. stocks.

Tom Petruno can be reached by e-mail at