Contrarian Investing and Lessons from Early Investments in AAPL, NFLX, FB, AMZN, TSLA
Over the past 8 years while managing two portfolios in public markets, I have made several contrarian bets. The first one of these contrarian bets was going “all in” on stocks in early 2009. Not all of my contrarian stock bets have panned out well but many have. I learned a lot from these experiences. So I want to share some stories about contrarian calls and my lessons from investing in Apple, Netflix, Facebook, Amazon and Tesla.
First of all I want to define that by contrarian I don’t always mean that the stock one invests in is viewed negatively by the market. Making a contrarian bet can also mean that one sees the potential of a stock being significantly larger than the consensus. This discrepancy can be due to a misconception by most market participants. So the contrarian view is not against the company but against the current perception of the market.
I want to point out what to look for when making contrarian calls. Granted I am discussing it within the framework of my investing philosophy and therefore this is not the only way to look at it.
I am a long-term investor; therefore any position I take is from a long-term perspective first. If it is contrarian, it basically involves some market timing. Also in my investing approach I don’t only focus on contrarian investing but it is just one approach out of many I use.
Contrarian investing is difficult because it requires one to go against the mainstream and the market. But it offers large upside if one is right. In reality I don’t like the term contrarian but prefer the term independent investing.
This is because contrarian implies as first reason of investing going against something (or in case of momentum going with something) and in my opinion this is a bad way of thinking about investing in general. When I look at any investment as a long-term investor, first and foremost I independently consider if it is a good investment in a company. Then as second, I consider it as contrarian when this decision can be timed with market confusion to make an outsized return.
The market can be frequently confused about a company. There are several reasons for this confusion. Here are some of them:
- The market is paying attention to a wrong or meaningless metric for a company
- The market is thinking too short term for a company
- The market is overreacting when a company is hit with a perfect storm
- The market is misunderstanding an important, larger dynamic involving a company
- The market is making an inappropriate comparison to a past phenomenon
- The market is misunderstanding the economic dynamics in a specific marketplace
- The stock price continues declining in an information vacuum after some less significant negative information about a company
- The broader market has a negative momentum and therefore neglects positive developments about a specific company
- Sometimes the market is confused about a company based on a combination of these.
I will try to illustrate these cases with specific examples in future articles and discuss how these types of phenomena happen.
Before I start discussing specific stocks, I want to state that one of the most important criteria for investing and specifically contrarian investing is independent conviction. It is important to know why one is investing in a company and this reasoning has to be independent.
Conviction can only come from independent reasoning because if one is basing investing on the opinion of someone else, in hard times if the market moves against you, it is impossible to determine if one is right or wrong and one basically has to rely on the other person’s judgment.
The reason strong conviction is more important in contrarian cases is because this conviction will be tested and sometimes severely. Sometimes if your call is right, you have to stick it out for a long time until the true outcome shows. Sometimes the market can be right and you could be wrong, therefore clearly understanding your reasons for the position and evaluating if they still hold are very important.
I started investing in early 2009 shortly after the financial crisis. In a way that was already somewhat of a contrarian call. It was a time when everyone was freaking out as the U.S. economy was in a tailspin. The broader markets were at multi-year lows and the financial system almost collapsed.
Aside from being driven by curiosity to understand what was happening, there were four main reasons I started investing during that time. Granted back then I was a bit naive about investing which made this call much easier.
- As the Federal Reserve stepped in with QE1, I began to think that the Fed had committed and now was in it for the long run. In a sense it had to do whatever it took to prop up the economy otherwise it would lose its face. If it had done just one round of QE and let the economy collapse again, it would look really bad as an institution. Also Ben Bernanke was fairly open about his intentions.
- The financial crisis was the second major bubble and collapse within a single decade (the first being the dotcom crisis). Two traumatic experiences within a decade had left major psychological scar tissue for many investors and a negative bias towards the stock market. Therefore it would be followed by a long period of psychological recovery and therefore a prolonged bull market.
- The information technology revolution was starting and picking up steam. This was a financial crisis. Although the financial system is the bloodline of the economy, the tech sector was still fairly healthy. This is why my very first investment was in Google (and soon after I took a big position in Apple). For the initial years I tried to stay away from financial companies to give them time to process their balance sheet mess.
- For a contrarian investor recessions are the best time to invest since they clear out the old and give rise to the new. I was still fairly young and comfortable to take risk. I looked at this as a lifetime opportunity and therefore put all my money into the stock market.
Not only did I invest all my money in stocks in 2009, I even borrowed a significant amount of money to put in the stock market. Some of that money was on margin from my broker and some was very low-interest credit card advances. I was trying to invest all the money I could get my hands on. So for many years I was highly levered and there was a lot on the line. I remember my roommate telling me that I was nuts.
Sometimes in investing you have to take calculated risks and sometimes even big calculated risks. Things worked out well, but of course I also got lucky since not all of it was up to me.
Then starting July 2010 I started managing a second un-levered portfolio which didn’t involve my own money and I had to use a more cautious approach for this portfolio (that portfolio has averaged 22% annually since then while showing significant consistency).
In my opinion, trying to time the broader market is “really really” hard so I mostly stay away from that and only try to time individual stocks. But the core of my investing approach is long term and is focused on finding the best companies, the big disruptors and also the most brilliant CEOs. Here is a past article about how to spot the most brilliant CEOs.
All the stocks mentioned above are from the tech sector but of course when investing, one has to analyze all sectors to capture the economy and the overall financial markets. I invest in consumer tech, consumer discretionary, telecom, financials, housing, industrials. But I focus on consumer tech and consumer discretionary because of my fascination with sociological phenomena and consumer behavior.
If one is making contrarian bets on companies, timing is very important. Ideally one wants to be close to the time-point when some information will come out and clear that specific confusion in the market. This of course is difficult to do and sometimes one is just forced to act early, wait and trust one’s conviction.
One of the best contrarian investors of the recent past is Carl Icahn. So I want to give tribute to him and all the others who have influenced my investing philosophy. I tried to learn as much as possible from the great public market investors Carl Icahn, Warren Buffett, Ray Dalio, Larry Fink and David Tepper. But the most important factor of successful investing is developing one’s own philosophy and approach.
One last interesting thought about being a good contrarian investor. Peter Thiel’s book “Zero to One” mentions a concept called “contrarian skill or ability”. This is any ability that one is good at that few people in the world are good at. Broadly speaking it can be any ability and does not have to be directly related to investing. But to help with contrarian investing it needs to be an ability that can be somehow used in an investing context. So if you are really good at holding you breath under the water for a long time, which very few people are good at, it is unlikely to be useful for investing. But if its an ability closer to the context of investing it can be very useful.
In my opinion, to consistently be a successful contrarian investor one has to see something that the large majority cannot see. Usually this is related to a contrarian ability since this ability gives one a perspective that very few people have and the majority does not have. So try to hone a contrarian ability that can be used in an investing context. Become good at something that no one else is trying to be good at.
I want to emphasize that not all my contrarian bets have worked out well and I also learned a lot from these failure experiences. I can summarize them in another article about my investing failures. Luckily there were not too many of them. But the focus of this article series is on the lessons from successful contrarian bets.
In the next article I will discuss investing in Apple as it revolutionized mobile computing and in consequent articles cover Netflix, Facebook, Amazon and Tesla.
I chose to structure these articles as stories. Travis Kalanick once mentioned that he does not ask people for advice, he asks them for stories. Stories are more valuable than “cookbooks” because they give the readers the chance to gather their own lessons from the context. Apple’s story is probably the least contrarian from this series but it still has valuable lessons for contrarian investing.
Since I am a dyslexic, I am prone to spelling and grammar mistakes. I hope that it does not distract from the substance of the article.
Thank you for reading this article