My Contrarian Picks Are Beating The Market

Published in Investing on 24 September 2012

A detailed analysis of one Fool's contrarian plays.

A few weeks ago I wrote the article 'The Loneliness Of The Contrarian Investor', highlighting the successes of some of my contrarian picks.

One poster made a very good point (hope you're reading this, DirtieDollie!) -- what about selection bias? That is, was I just picking out my most successful selections, and ignoring the ones that had flopped?

It's a very valid point. It's seductively easy to shout about your successes, and just not mention the calls you got wrong. It is hard to be humble.

So, to settle this argument, I thought I'd undertake a detailed analysis of all my contrarian picks over the past year. If we look at both winners and losers, how have I done?

The rules

Here are the rules: I will look at share picks I have made over the past 12 months. I will not include picks from this current month, as it is too early to really say how these are doing (if they were included they would make little difference to the results, as most of these shares haven't yet made much of a move).

I will only include picks that I have described as 'contrarian', 'turn-around' or 'recovery' plays -- ordinary 'value' picks don't count. I also only include shares where I completed a reasonably detailed analysis, rather than those I have just mentioned in passing.

Occasionally I have discussed these shares more than once -- for example, Barclays (LSE: BARC) -- in which case I have only included the article where I have described the share as a contrarian pick.

Finally, although I have tried to be as fair as possible, there is always a chance I have made a mistake. Let me know if I have!

The results

So here are the results:

Tip dateCompanyShare price change, %FTSE All-Share change, %
09/07/2012Barclays36.94.7
14/05/2012Resolution (LSE: RSL)5.47.5
14/05/2012First Group (LSE: FGP)17.77.5
29/12/2011Barratt (LSE: BDEV)94.67.1
14/12/2011Fidelity China (LSE: FCSS)-3.310.9
05/12/2011Admiral (LSE: ADM)19.66.6
05/12/2011Inmarsat (LSE: ISAT)34.56.6
05/12/2011Kazakhmys (LSE: KAZ)-23.76.6
02/12/2011BMW8.76.9
23/11/2011BSkyB (LSE: BSY)2.815.4
23/11/2011Aviva (LSE: AV)18.315.4
23/11/2011BP (LSE: BP)1.415.4
17/11/2011ITV (LSE: ITV)34.39.3
17/11/2011Vedanta (LSE: VED)-18.29.3
 Average16.39.2

I have achieved a rate of return of almost double the market

So how have I done? Well, of 14 picks, 11 are up and three are down. On average my selections are up 16.3%, compared to the FTSE All-Share, which is up 9.2%. Considering the average time scale over which these picks have been calculated is roughly eight months, that is a very reasonable rate of return.

Overall, I have achieved an increase in value almost double that of the wider market; I have beaten the market by over seven percentage points.

You might notice that I have not mentioned dividends but, of course, income from dividends would further boost the returns -- especially since many of these companies -- notably Aviva, Admiral, Resolution and First Group -- are high yielders, too.

My biggest winners have been in some of the most unloved sectors: house building, banking, insurance and free-to-air broadcasting. My biggest losers have, interestingly, been in just one sector: mining. This is evidence that mining really is different, as I discussed just last week. The extremely cyclical nature of mining companies makes it harder to call the bottom.

But you know what follows pride....

Is it time to puff out my chest with pride? Well, perhaps, but -- to be honest -- I have surprised myself. When I made these picks I had absolutely no idea how these would do.

To be frank, I seem to have stumbled upon a way of investing that, quite simply, works. But you know what follows pride... Perhaps this is just beginner's luck. Perhaps contrarianism is something that just happens to work in this particular market.

Or maybe, just maybe, I really am on to something. Maybe this really is a framework for my investing strategy into the future.

Have I piqued your interest? Well, I certainly will continue to pursue this approach. I will continue to look for beaten-up, unloved and ignored shares to see if there are contrarian opportunities. Will I continue to beat the market? Well, we will just have to wait and see...

Perhaps the world's most celebrated contrarian investor is a certain W.E. Buffett of Omaha, Nebraska. He is noted for making calls that were much derided at the time, but turned out to be winners. Read our free report about the "One UK Share That Warren Buffett Loves".

Searching for dependable FTSE dividend shares? This free Motley Fool report -- "8 Shares Held By Britain's Super Investor" -- reveals the major companies favoured by high-yield legend Neil Woodford.

Further Motley Fool investment opportunities:

> Prabhat owns shares in Barclays, Fidelity China, Kazakhmys, Aviva and BP, but does not own any other shares mentioned in this article. He also previously held Admiral and BSkyB, but has taken profits on these shares.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

goodlifer 24 Sep 2012 , 11:42am

"Considering the average time scale over which these picks have been calculated is roughly eight months, that is a very reasonable rate of return."

You've had no rate of return - apart from your dividends - unless or until you've sold the shares and banked the money.

Till you've done that the figures you quote are just seductive moonshine - don't let them fool you.

ps200 24 Sep 2012 , 11:55am

Hi goodlifer,

That's a very valid point, but if you read the text at the end of the article you will see that I have already banked my profits for Admiral and BSkyB, thus making my return 'real'.

The other shares I continue to hold because I expect both further capital appreciation and also dividend income. But eventually I expect to bank my profits on these too. It's probably not worth writing a Foolish article every time I bank my profits on a share, but perhaps there is scope for a 'where are they now?' article on these shares sometime in the future.

Best wishes,

Prabhat.

ps200 24 Sep 2012 , 12:31pm

P.S. I always look forward to your posts, goodlifer - please keep sending them through.

Pls1nve5t 24 Sep 2012 , 12:49pm

Hi Prabhat,
It is very easy to miss the words about the winners that you sold, as when we get to the Bufffet / Woodford plugs everyone automatically skips forward to the comments section.

Good article though - Thanks

MAACPRIME 24 Sep 2012 , 1:19pm

I had two-thirds of my holdings in Barratt and one-third in General Motors. Go me.

goodlifer 24 Sep 2012 , 2:03pm

"If you read the text at the end of the article you will see that I have already banked my profits for Admiral and BSkyB, thus making my return 'real'."

I think you mean "a bit of my return."

ps200 24 Sep 2012 , 2:23pm

Alright, alright, alright... calm down, dears, it's just a TMF article. Maybe all my picks really will go belly up in a few months time - to be honest, nobody really knows.

In the mean time, I'm going to boil myself a nice cup of tea, grab a custard cream, and have a lie down.... (:o)

Prabhat

goodlifer 25 Sep 2012 , 11:47am

How can you say, "I expect both further capital appreciation and also dividend income. But eventually I expect to bank my profits on these too,"
when you apparently think, "Maybe all my picks really will go belly up in a few months time - to be honest, nobody really knows?"

I really did enjoy that cup of tea though.

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