Daring to be Different | Barita Insights | January 16, 2023

Introduction
Warren Buffett, one of the greatest and most famous investors of all time once said, “Be fearful when others are greedy. Be greedy when others are fearful”. Howard Marks, another great investor, stated in his book, The Most Important Thing, “Large amounts of money aren’t made by buying what everybody likes. They’re made by buying what everybody underestimates”. These two quotes follow the same underlying theme, that is, contrarianism or being different. For investors to have a chance at earning above-average returns, they will have to hold a portfolio of assets that is different from the crowd. By holding a portfolio of assets that is similar or the same as the crowd, the investor can perform poorly or superbly (on an absolute returns basis) but he will not be above average (or below average). In order to have the chance to outperform, the investor needs to dare to be different.

Opportunities in a Market Decline
Markets move in cycles, meaning there will be periods when the market declines followed by periods when the market rises. Let’s look at the data. The S&P 500 index, an index that tracks the market capitalization of 500 large-cap publicly listed companies in the United States, began 2020 with a value of 3,230.78, but cratered in the first quarter of the year as fear surrounding Covid-19 made its way through the equity markets. On March 9th, 2020, in one day, the S&P 500 index fell 7.6%, followed by a 9.5% decline on March 12th and a 12.0% decline on March 16th. By March 23rd, the index had declined by 30.8% to 2,237.4 since the beginning of the year, the index fell from 3,230.78 at the start of the year to 2,237.4 at the end of March 23. However, following this decline, the index rebounded and would go on to increase by 67.9% to close out 2020.

Locally, the JSE Main Market index followed a similar trend at the time. The index started 2020 with a value of 509,916.44 and later fell to 342,093.88 at the end of March 25th, representing a decline of 32.9% for the year to date. Unlike the S&P 500 index, the JSE Main Market index is yet to recover, having closed trading on January 13th, 2023, with a value of 345,497.10. Markets do not always quickly rebound as the S&P 500 index did in 2020. A historical example of this can be observed looking back at the climax of the global financial crisis in 2008, when the S&P 500 index closed the year with a value of 903.25, representing a 38.5% year-over-year decline from a value of 1,468.36 at the end of 2007. The index did not recover until early 2013, translating to a ~4-year recovery. However, after the recovery, the market continued to sustain a multi-year bull run, with the index value moving from 1,426.19 at the end of 2012 to 4,766.18 at the end of 2021, representing cumulative growth of 234.2% or a compounded annual growth rate of 14.4%.

The point of showing these statistics is to reveal that there are periods in time when markets decline, and the majority of investors are (panic) selling. This is a period where investors should consider daring to be different and buy when others are selling, or at least not sell and hold while others are selling. By doing this, the investor may forego the realization of losses unnecessarily and be better positioned to fully participate in the eventual rebound. It is difficult to time the bottom, hence staying invested is likely the best route for many investors. Importantly, it is not enough to just be buying when others are selling just for the sake of being different, investors need to have a reason for doing it, backed by research and analysis. This approach will help to avoid the psychological pressures that could lead to panic selling.

The Flip-Side
Being different from the crowd can provide the chance to outperform, however, it also provides the chance to underperform. In daring to be different, the investor must prepare to possibly be wrong or look wrong for some time and wait for the market to catch up. The assets that the investor’s peers hold may be appreciating (or peers may have sold and gone to cash in a market downturn) while the basket of assets that the investor holds is flat or declining in value. A part of daring to be different is possibly looking wrong for some time, therefore the investor needs to be able to survive this period in order to realize gains over time as his investments appreciate. Surviving could mean having a separate reserve of cash, or a stable source of excess cash flow to ward off the pressure to sell their holdings in a downturn, whether it be for obligations or the sheer psychological pressure that comes with seeing their holdings reduce in value (helping to prevent panic selling).

Conclusion
Daring to be different can be a double-edged sword as it can potentially lead to outperformance or underperformance if the investor’s thesis is flawed. In being different, the investor has to be prepared to look wrong for some time and they would need to be able to survive these periods of time to realize the gains from their investment decisions. Being different does not guarantee over or underperformance but simply the chance to over or underperform. Depending on one’s goals, risk tolerance and personality, taking such a risk may be unsuitable and it may be more appropriate to hold an index tracking fund rather than seek excess returns beyond the tolerance for risk. However, for those who seek above-average returns, i.e, beating the market, contrarianism from time-to-time may not be avoidable.