"Be fearful when others are greedy, and greedy when others are fearful," said famed billionaire value investor Warren Buffett. The Chief Executive Officer (CEO) of Berkshire Hathaway Inc. (BRK.A) is among many market watchers that recommend a contrarian strategy in order to profit from the market's giant upheavals. According to Deutsche Bank, going against the herd can lock in better gains for investors over time that a simple buy-and-hold plan, as outlined in a MarketWatch report. (For more, see also: 8 Contrarian Stock Picks for a Rocky Market: CS.)
Outperformance of High-Outflow Portfolio Picked Up in 2009
On an annualized basis, portfolios that buy the least-loved ETFs, which trade like stocks on an intraday basis, see gains of 12.9%, more than twice the 5.7% gain of a portfolio that buys funds with the highest inflows, as reported by MarketWatch. A recent study by Deutsche Bank, which analyzed the performance of exchange traded funds (ETF) following periods of higher inflows or outflows, showed that portfolios which bought ETFs with substantial outflows were rewarded with significantly higher returns than those that bought funds with heavy inflows.
Contrarian Strategies: Rich Returns
The outperformance of the high-outflow portfolio accelerated dramatically in early 2009, at the start of the bull market which came directly after a bottom caused by the 2007–2009 housing crisis. At that moment, the S&P 500 hit a 12-year low, dragging investor sentiment down and leading investors to cut holdings. By early 2009, the market began to pick up, securing more than quadruple gains over the following 10 years.
Jeff Kleintop, global investment strategist at Charles Schwab, takes a contrarian approach to stock investing, as opposed to the ETF outflow approach.
"A shark attack could take a big bite out of unprepared investors' portfolio who don't rebalance," he warned, as cited by MarketWatch. The investor indicates that "to help avoid a shark attack," one should look abroad to international equities, reposition from a growth to value-oriented portfolio, and rebalance from small-caps to large-caps.
It's important to note that this approach, like all investing approaches, does not guarantee success. Further, in the case of a global recession and bear market, all assets could be hit hard. (For more, see also: 6 Small Tech Stocks That May Pay Off Big.)