Why 2016 could be contrarian investors’ paradise at the NSE

One of the contrarian investors, Warren Buffett (above) said they attempt to be fearful when the herd is greedy and greedy when the rest are tip-toeing. PHOTO | AFP 

By SAMUEL K. GICHOHI

A bull market had been aptly described in some quarters as a market that makes even the lousiest investor look like an investment guru.

This is because trend-following is the norm in markets like the Nairobi Securities Exchange (NSE).

Of course, this is only true until the trend flips on you like it did for NSE investors in the recent interest rate hikes that happened in Q4 2011 to Q1 2012 and in Q4 2015.

Both were a result of fiscal tightening triggered by currency fluctuations. Interest rates and share prices are negatively correlated so shares will normally drop whenever interest rates go up.

This brings into focus the contrarian investor who by design is a naysayer of sorts who is often mistaken for a pessimist in the bull market since they traditionally move in the opposite direction to the proverbial herd.

The Safaricom IPO comes to mind here, I remember asking a client, if everyone was buying to sell at a higher price, who would they be selling to? Of course this largely fell on deaf ears as the herd was already in full euphoria mode.

Being a contrarian investor comes with an equally strong will and self-confidence since you are often labelled an idiot for not following the masses and charting your own lonely path when making investment decisions.

Take for example the recent interest rate hike that triggered a surge of interest in T-Bills from the investing public. It would be interesting to see how many new CDS accounts were opened with CBK in those two months.

The problem for investment advisers like myself was that most of the funds being pumped into T-Bills was being sourced from ill-informed divestment from the stock market.

I say ill-informed because these divestments were happening after the market had already tanked as a result of the increase in interest rates hence selloffs were at a loss.

A contrarian investor would have told you that since interest rates on GoK securities are annualised, that is 20 per cent annually translates to about five per cent for the 90-Day T-Bill which also attracts a 15 per cent withholding tax.

It would thus take you about a year to recover the losses depending on the percentage loss.

The securities market will probably have rebounded by around that time so you were better off averaging down on the losses on stocks that are still fundamentally sound.

Value traps should not feature in this scenario since their decline in value is not directly linked to the increase in interest rates.

Contrarian investors had sold on the first whiff of a weakening shilling and had the funds to buy on the cheap just like they are the only ones you see buying during the festive season when there is little or no activity.