Egypt and the old contrarian

The old contrarian is looking at Egypt as an opportunity of the decade.
We ranked the MENA performance before Egypt was in the news and for the last 12 months Egypt CCSI was one of the worst performing markets of the region. For us at Orpheus markets tend to make solid bottoms under extreme negative news and this is what seems to be happening in Egypt, the worst news is taking the markets lower into a multiyear bottom.
Egypt might look like a different extreme than the Tulip Mania, but both of the events created extremes. The former event is subduing prices while the other rocketed them up. At the top of the Tulip mania, a sailor was imprisoned on felony charges because he mistook a valuable tulip bulb sitting on a countertop in a merchant’s office for an onion and ate it for lunch along with a piece of herring. The bulb was so valuable that it would have paid to feed his shipmates for a whole year. These strange times repeat. Tulip mania was the time that a few thought about shifting from the gold standard to the tulip standard.
In their book Contrarian Investing, Anthony M. Gallea and Wiliam Patalon talk about the psychological makeup of a contrarian. Nothing much has changed over time. Even now feeling like a contrarian is different than actually being one. For every true contrarian, there are 100 who falsely claim to be contrarians. Contrarians have patience, and they have no confusion between brains and bull markets. The authors talk about grace in accepting failures and being a natural skeptic. “What’s hot is where you are not”. The makeup also includes the ability to stand alone, be alone to the extent of being ridiculed and all the while knowing that fear and doubt are signs of weakness.
Having a resolute mind is important as the contrary is considered a derogatory word in English. The word is explained by synonyms like opposite, counter, contradictory, contra positive, converse, antithetical, incompatible, incongruous, and irreconcilable. Only a tough mind can allow a contrarian to respect popular opinion but not let it sway his basic convictions.
It’s the holding approach where the old contrarian may not agree with the new contrarian, holding for an average 3 year periods. Just like the holding, the old contrarian philosophy also has thumb rules of entry. The authors talk about a 50% fall on a stock from a 52 week high and suggests looking for opportunities all the time. This again qualifies Egypt as a value allocation. Assets that fall more than 50% from their 52-week highs tend to outperform the stock market for up to 3 years. According to the old contrarian, most of the money is made by sticking to a position and not through frantic trading. There is a lot of truth in this statement.
Value investing and contrarianism have common roots as both involve picking up assets at an extreme value. Contrarians don’t buy at the top and they don’t sell at the bottom. Quite the opposite, while all the investors intend to buy low and sell high, it’s the contrarians who do it consistently. Contrarians will not buy a stock unless nearly everyone else hates it. By going against the crowd reduces investing risk strategies limiting downside risk. Just like entry even exits are important. According to the authors, “When to hold them and when to fold them up is connected by down by half rule and up by half rule respectively.”
The ability to anticipate the market instead of reacting to it is one of the most important attributes that separates the consummate investor from the rest of the crowd. It’s the anticipation that keeps the contrarian from the trend extrapolation strategy to a reversal strategy.
Even a contrarian needs a system, whether it’s technical, fundamental, quantitative or cyclical. The simpler the system, the more successful it’s likely to be. “The fewer the moving things, the fewer the things it can break.” He just needs to remember, it’s always darkest before the dawn. Contrarianism can stop the endless search for the guru to take you to the promised land. It is the solitary walk that gets us to our destination. Revolutions, wars are great contrarian indicators, but these are once a lifetime opportunities when the society pushes to the negative extreme.
So what are the other extremes do we see in society today? We talked about credit extreme, we have talked about gold exponential extremes, natural gas is on the down extreme (subdued for more than a few years, down 90% from its top), volatility is at a historical multi-year low and global equity is at multi-year high. We have extremes all over the place. We need an eye to identifying them and a psychology to bet on them.