What to do with the contrarians?

If you are in these markets for any time at all, there is going to come a time when you look at the darling of AIM market and think to yourself:

'This is a pile of absolute rubbish. Why is anybody investing in this obvious nonsense?'

And the worst of it is that everyone, including investors you typically agree with, is piling in. And then you're hit with the dilemma, that simply does not exist with large cap companies:

• If you voice your concerns, you're a de-ramping, shorting, unresearched idiot who refuses to see the incredible upside. You should be taken out back and handed over to the firing squad. 

• If you don't say anything, you become complicit as the share price rises significantly above what you consider to be the stock's real value. Until, that is, somebody asks you for your opinion - and you can either avoid the question (like a coward) or give your opinion (and suffer the consequences).

The problem is that while you might have honourable intentions, not everybody does. Some individuals relentlessly post negative material across social media, in an effort to damage a business simply for fun. Some men just want to watch the world burn. 

Others do the same, but with an open short position - or alternatively, because they recognise the potential and want to get in cheap. Indeed, it's often the case that once they have bought, they then claim to be reborn, and ramp the stock to higher than its realistic value before pulling out with the profits and then starting all over again.

So how do you as an investor consider your contrarian? Every stock has one - and you have no idea whether they are attempting to help you avoid a disaster (AIM has plenty of these), or are trying to damage your investment.

First up, there are some classic signs that a contrarian is on to something material. For instance, if they go on Twitter or Telegram or LinkedIn with their bear case, and they are immediately and only attacked with personal insults, then as a general rule, they have a view worth considering. If instead, their points are individually addressed and the sentiment left out of it, and they don't retort, generally they're just stirring the pot.

But sometimes, it's a bit more insidious than that. Sometimes, the contrarian will simply highlight all the negatives in the stock that are already widely known - and then make an attempt to ignore all the positives. You can't argue against the negatives (but you can say that if there were no negatives, the company would be worth significantly more). 

And occasionally, they will agree that the company is a good opportunity, but overvalued on a peer comparison basis.

As the owner and sole admin of a fairly popular Telegram Group, one of the more complex problems I have come up against is dealing with contrarians; because even in a multi-stock channel, there is going to be dozens of bullish investors for every one contrarian. Tempers flare up, personal insults get thrown around, and calls to throw the contrarian out onto the street can be vociferous.

And yes, I do occasionally ban someone when they go too far on the personal front - but even when a contrarian is voicing an opinion that hurts my own position, I think it's generally worth listening to it, conducting further research, and then coming back to them. 

If someone is posting a damaging viewpoint (or often, allegations insinuating underhanded play), then ask them to bullet point their grievances in neutral language. If they can't do that, ignore them. If they do, then go through each one - and for each, consider whether it is new information, and the extent to which it affects the investment case beyond what you knew when you originally invested.

And post your response.

Additionally, highlight the positives - and clarify that the risks are baked into the market capitalisation already.

What you DO NOT want to do, and especially in a single-stock group, is to throw out anyone who isn't 100% fully on board the train. It's perfectly reasonable to ask difficult questions, and it's also human nature not to want them asked when the share price is rising and all seems peachy.

You also don't want to discourage reasonable bears with researched points; because you end up in an echo chamber of positivity, often as the share price continues to fall. 

On the other hand, I find it frustrating when individuals spend all their time highlighting the known risks; we know there are risks. You are investing in the junior resource sector - plenty of companies fail, most are placing shares at a discount on a regular basis, and while everybody would love to discover the next Havieron or Kasiya, most would be lucky to find a local asset they can sell for a small premium. It's not fair for a bear to make an attack on a company which simply argues it is high risk; virtually all of them are!

But the most important takeaway is research. If a bear comes in with their inconvenient opinion - then only two things can happen. Either:

• They add nothing new that you did not already know.

• They have uncovered a headwind you did not previously know.

If the former, you can simply point it out. If the latter, then it's potentially your own fault (I include myself in this on occasion) for not conducting thorough due diligence. The question, then, is one of whether it changes your investment decision.

Finally, consider the contrarian's past activity; if they have repeatedly made good calls, then it's worth paying attention. If not, then it may be worth pointing this out to them publicly. And if they just straight out lie, call them out on that too.

The main takeaway is to treat a contrarian's opinion with the same level of skepticism you would a price target on a broker note; both often have ulterior incentives - but if you are invested or planning to buy some stock, it's always best to consider all points of view.

- Charles Archer 23/8/2024