Diana Clement: Just let the lemmings leap

Think different. Following the less travelled path will lower your risk and give you the opportunity to outperform - Joe Mansueto, founder of Morningstar

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The herd instinct is alive and well in New Zealand's investment markets. According to research from the ASB Investor Report, 24 per cent of people expect residential property to provide the best investment returns this year.

At the same time, according to research from the NZX and ABN Amro Craigs, 11 per cent of non-share investors plan to invest in the sharemarket in the coming year.

The herd typically invests where others have been making money. With healthy capital increases in residential property (13.5 per cent) and the NZX-50 (10 per cent) in 2005 it's not surprising that every man and his dog wants a slice of the action.

But a cynical breed of investors - the contrarians - would rather eat pickled tripe than bank on the NZX beating inflation yet again this year or buy a 40sq m Auckland apartment.

The mantra of the contrarian investor is: "Be where the rest aren't". They view the latest trends sceptically unless their independent research finds value in the fashion.

The world's most famous contrarian, Warren Buffet, steered clear of doubling and trebling technology stocks in the late 1990s - raising eyebrows of those who thought he was a Luddite. And John D. Rockefeller after being told by a shoe-shine boy that he could make money in shares - went back to his office, phoned his broker and sold up on the eve of the 1929 sharemarket crash.

Sadly, the lesson a lot of investors learn from history is that they never learn from history.

Even within the past decade, there have been times when investors were being told to ignore the fundamentals about Japan "because Japanese companies are different" and technology stocks, because "dotcoms offer a new paradigm". American fund guru John Templeton, said: "The most dangerous words in investing are 'This time it's different'."

Many property investors who are experiencing their first cycle think that the party will go on. But sooner or later all investment markets turn. The majority of private investors follow the pack.

Graham Wilson, director of investment education for the New Zealand Shareholders Association, cites Graham Hart's purchase of Carter Holt Harvey as a classic contrarian purchase. With the dollar high and tree prices at historic lows the business might not look appealing to the herd.

Contrarians aren't always right, says Cam Watson, head of research at ABN Amro Craigs. But when they are, the results can be spectacular. Watson said his company moved into Japan last year "with our eyes closed" at a time when it was deeply out of fashion. The position paid off and hedge funds and other investors have followed suit. After such a strong run, contrarians may now be tempted to sell Japan rather than buy.

Wilson cautions against extreme forms of contrarianism such as using derivatives to bet the dollar. "The risk then is that the dollar is high, but it doesn't fall, or doesn't fall for three years," says Wilson. One of Wilson's favourite sayings is John Maynard Keynes' quote: "The markets can stay irrational longer than you can stay solvent."

What's more, says Mark Brighouse, vice-president of the CFA Society of NZ, buying assets simply because they are out of favour doesn't work on its own. "A falling asset may still be overpriced," says Brighouse.

With most major asset classes looking fully or overvalued, the job of a contrarian to find out-of-favour assets with good prospects isn't an easy one.

Financial planner Robert Oddy, of International Financial Planners, said many professionals in his industry thought he was "nuts" a year back when he recommended to clients to buy gold - although it had no yield. At the time, gold was selling for US$435 an ounce compared with around US$560 now.

Oddy is still in favour of gold, which he says is projected to go to US$650 by the end of the year.

Like many commentators, Jeff Matthews, senior financial adviser at Spicers Wealth Management, believes the smart money is going offshore. "Even if you only make 7 per cent to 8 per cent on overseas investments, you might pick up 10 per cent to 12 per cent currency gain [if the NZ dollar falls]."

As well as undiscovered territory, contrarians put their belief in battered sectors. The retail sector is out of favour due to concerns about a slowdown. Watson says the sector is displaying a number of factors favoured by the contrarians. Prices have fallen and dividend yields are high. Some companies such as Hallenstein Glasson have been marked down, yet have come out with strong sales numbers. Two other retail companies with high dividend yields that may draw the attention of contrarians are Restaurant Brands and Turners Auctions - the latter of which has been hit by competition from Trade Me.

Likewise Brett Wilkinson, of Direct Broking, says contrarians may eye The Warehouse - a battered stock - with the belief that it has already been discounted by the market and its fortunes will turn.

Just this month, German academic Andreas Roider, of the University of Bonn, released a study involving 6500 participants playing a sharemarket game for an €11,000 ($19,650) prize.

On average, the psychologists earned three times as much as economists and physicists in the game. The psychologists tended to decide against buying shares precisely when a lot of other players who they viewed as lemmings had bought them.

Meanwhile, contrarian property investors, it would appear, are sitting on their hands waiting for the bloodbath while the herd continues to be sucked in by advertisements for allegedly high-yielding apartments.

Oddy has been watching mortgagee sales - virtually unheard of during the bull run of the past few years. There will, he predicts, be good bargains to be had.