The stock market was up more than 6% in the 3rd quarter, and we maintained our margin of outperformance for the year to date. This is especially good because 2012 happens to be a year when 70% of managers are under performing the 16% market return.
Much lip service is paid to the term “market contrarian.” In the volatile world of today, it is even hard to define the current contrarian views. We know that twelve years ago, being a contrarian was believing that paying 40-60 times earnings for leading technology stocks was very expensive and not wise. Then, being cautious about the stock market was also contrarian. Today a contrarian is an optimist, someone who believes that our elected officials can avert “the fiscal cliff.” A contrarian would assert that it is within the power and capacity of the European economic leaders to solve their fiscal problems. And finally a contrarian today is one who believes that there is a way to achieve peace in the Middle East, in our lifetimes.
We make these points to highlight how things have changed in a relatively short span of time and to underscore that in our belief, true contrarians are usually right. One typically makes much more money investing by going against the grain rather than extrapolating from recent events. The reasons are tied to behavioral finance. Investor expectations get priced in and therefore, when surprises occur, their impact is magnified. This year is proving that point.