Why acting like George Costanza could help save your investments

Despite Monday’s trillion-dollar meltdown, it’s hard not to be a stock market bull right now.

Last week, Wall Street celebrated Trump’s arrival at the White House with the strongest weekly gains for the start of any presidential term since Reagan’s 1985 inauguration.

The S&P 500 hit a record high, as did stock markets in the United Kingdom and Germany, while Bitcoin also notched a record touching $US110,000 ($174,000). Australian stocks are less than 2 per cent from all-time highs.

Jason Alexander as George Costanza, a noted contrarian.

But it’s when bullishness reaches fever pitch, as it has now, that investors should question the direction of the herd, and embrace their inner George Costanza and do the opposite of what their instincts suggest.

This counter-narrative strategy is encapsulated in my favourite episode of Seinfeld, “The Opposite”, where Costanza, down on his luck, decides to try and turn his life around by doing the opposite of what he would normally do.

“If every instinct you have is wrong, then the opposite would have to be right,” hypothesises his best friend Jerry, at which point George proceeds to order chicken salad on rye, instead of his usual tuna on toast, and from that moment on, his luck begins to change.

Based on multiple indicators, the US market could easily drop by 60 per cent before valuations are reasonable.

Adam Schwab, co-host of business podcast The Contrarians

In the world of investing, this strategy is known as being a “contrarian”, someone who intentionally bets against the prevailing market sentiment. Some of the most profitable investors of all time have been contrarians.

George Soros made $1 billion in a single day betting against the British Pound. Michael Burry, made famous in The Big Short, made his fortune betting against the US housing market.

Warren Buffett’s mantra is to “be fearful when others are greedy, and greedy when others are fearful”. Ray Dalio, founder of the largest hedge fund in the world, believes: “You can’t make money agreeing with the consensus view.”

Warren Buffett’s mantra is to “be fearful when others are greedy, and greedy when others are fearful”.Credit: AP

And the consensus view currently is that everything is fine and dandy in stock market land.

“It’s difficult to think of any asset class that’s not grossly overpriced right now. Global shares, Australian property, art, luxury assets like yachts – all bear little resemblance to their intrinsic values,” says Adam Schwab, co-host of business podcast The Contrarians, who believes we are experiencing “the second-biggest asset bubble of our lifetimes”.

Schwab points to the Schiller ratio and Buffett Indicators, metrics of valuing stocks based on earnings and market capitalisation, both of which are at their highest levels since the 2000s dotcom bubble.

“Based on multiple indicators, the US market could easily drop by 60 per cent before valuations are reasonable,” estimates Schwab, specifically calling out several stocks he has a bearish view on, including Atlassian, Wisetech, Apple, Nvidia, and Tesla.

“The notion that these businesses will ever earn enough income to justify their current valuations is beyond laughable,” he says. That’s where contrarian investing philosophy comes to the fore.

“The only way to generate long-term outperformance is to do something different from everyone else. Currently, that means sitting out of the market or selling,” says Schwab. “When an investment class becomes mainstream, it may not have peaked, but the windfall gains have likely been soaked up.”

It’s a view that is increasingly shared by some of the biggest investors in the world.

“The best thing to do is always the opposite of what everybody else is doing,” Nicolai Tangen, chief executive of Norway’s trillion-dollar sovereign wealth fund, the single largest owner of stocks in the world, told Bloomberg from the World Economic Forum last week.

“If you were to do the opposite of everyone else right now, it would be to sell the US tech stocks, and buy China,” said Tangen.

Although Tangen stopped short of saying whether his fund is doing that (it’s market sensitive), he has been known to encourage his traders to be more contrarian, not an easy thing to do during a roaring bull market.

“If you are a contrarian […] there will be periods when you underperform and everyone is going to question your sanity,” he says.

“Being a contrarian means you need to look stupid for an extended period. It’s not fun to be the guy saying ‘this price makes no sense,‘ while a crypto bro is telling you to ‘have fun staying poor,’” echoes Schwab.

In my brief experience of trading markets, some of the strongest contrarian indicators include friends and family mentioning stocks at barbecues, mainstream financial media reporting on hot market trends (except for this column, of course), and Jim Cramer, who is famous for making bullish calls right at the top.

“In fairness to Jim, it takes some skill to be wrong as often as he is”, agrees Schwab.

With company earnings in the US and Australia set to drop over the coming weeks, there is a risk that the current sky-high valuations may face a reality check with gravity.

But don’t necessarily hit the big red sell button yet, as Schwab cautions: “Markets always revert to the mean, but they can stay irrational longer than you can remain solvent. Don’t expect it to happen overnight.”

In investing, like life, those who have the courage to go against the grain can be rewarded handsomely.

So, whether it’s locking in some gains by selling into a roaring bull market, buying Chinese stocks when everyone else is bearish on them, or ordering the chicken salad instead of tuna on toast, embracing your inner contrarian may be the most profitable choice you make.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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