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Contrarian investing capitalizes on human frailty—namely,
that people tend to overreact. In the marketplace, investors often
flee companies experiencing relatively minor problems even though
they are sound from a long-term perspective. Contrarian investors
take advantage of such short-sightedness by buying the stocks when
they are undervalued, anticipating that their valuation will rise
when the market recognizes their worth more accurately.
“Only those who will be sellers of equities in the near future should be
happy at seeing stocks rise,” said Warren Buffet, widely considered one
of the best investors alive, explaining his contrarian philosophy. “Prospective
purchasers should much prefer sinking prices.”
The question is, to what degree is contrarian investing consistent with socially
responsible investing (SRI), and to what degree is it, well,
contrary?
“In my view, contrarian investing is completely compatible with SRI,” said
Jerry Dodson, founding president of Parnassus Investments, which self-identifies
as a contrarian SRI firm. “The idea of contrarian investing is that you
buy a stock when the price is down, usually after something negative happens
to the company from a financial—not a social—point of view.
“ A financial reverse does not mean that a company is not socially responsible,” Dodson
said.
Social investors use many of the same financial analysis methods as those employed
by traditional investors, so adding contrarian considerations to the toolbox
only makes sense.
Judy Seid, a certified financial planner and founding president of San Diego-based
Blue Summit Financial Group, wholeheartedly agrees that “SRI can definitely
be consistent with contrarian investing philosophies.” However, she also
has one cautionary note.
“ SRI investors are not necessarily trying to time market trends as a contrarian
might,” Seid said. “An SRI investor uses a value-centric compass
to guide their decisions with their sights on long-term performance, rather than
taking a market-timing approach with hopes of short-term gains.
“ Social investors who want their money to help support companies that are
doing the ‘right’ things could possibly feel that ‘timing’ these
stocks is counter toward that goal,” she added, before ultimately rebutting
this line of reasoning. “I see using a contrarian approach as simply an
additional way to make the ‘best’ stock selection at the ‘best’ time.”
Seid’s colleague Shane Johnston, a financial consultant at Blue Summit,
points to a specific sector favored by SRI to illustrate how SRI and contrarian
strategies can overlap.
“ We saw extreme exuberance toward alternative energy stocks in 2001, when
we had a run up in gasoline prices, then a hard drop until 2003, when these stocks
went out of favor,” Johnston said. “A contrarian would see this as
an overreaction and possibly a good time to buy these stocks.”
From an SRI perspective, potential contrarian investments would still need
to pass positive and negative screens. So while alternative energy companies
would
clear positive hurdles on environmental criteria, some might be blocked by
exclusionary screens. FPL Group, for example, is invested heavily in wind energy,
but potentially
could be screened out because it also operates nuclear power plants.
Dodson cites Intel as attractive from both a contrarian and an SRI perspective.
“ Intel is selling around $19 per share, down from $32 a share, because
of strong competition from AMD,” he said, referring to microprocessor company
Advanced Micro Devices. “I expect Intel to bounce back over the next 12
months because it will bring out new products, and also because it’s a
financial powerhouse with a lot of assets.
“ Intel meets the Parnassus social guidelines because of a strong environmental
protection policy and a great workplace,” he added. “It appears on
the Fortune list of the 100 Best Companies to Work For.”
Seid and Johnston point to two other potential SRI contrarian picks:
Martek
Biosciences, which produces a baby formula additive from natural algae that
mimics mothers’ breast
milk, and Trex, which makes wood-like products out of recycled plastic grocery
bags.
“ Martek has suffered because supply has not been able to keep up with demand,” Seid
said.
“ Trex is out of favor right now due to having had some poor earning as
well as increased competition with other products coming to market,” added
Johnston.
Stepping back, Seid, who has specialized in SRI for 23 years, draws a more
philosophical analogy between contrarianism and SRI.
“ Many of us who have been promoting SRI for the last 10 to 20 years have
felt a bit like contrarians at times,” Seid said. “Given the history
of the industry and the uphill battles that have been fought and sometimes lost
urging boards, shareholders, fellow activists and governments to play a more
participatory role with corporate governance, it has been perceived as an ‘out
of favor’ trend to back SRI investments.
“ However, today we are seeing a huge paradigm shift in the marketplace
with SRI investments becoming quite mainstream,” she added. “Yesterday’s
contrarian social investor is today’s savvy shareholder, taking actions
to ensure the continued growth and success of the companies of which they hold
stake.”
This article originally appeared on www.SocialFunds.com, the largest personal
finance site devoted to socially responsible investing. William Baue works
with SRI World Group, Inc., the publisher of www.SocialFunds.com. |
