One popular investment strategy is contrarianism–the idea that you invest in the opposite of the broader market trend. At its core, this style assumes that markets get things wrong in the short term–they overreact or misunderstand data, so betting against the market can get you well priced stocks at a discount (or short assets in a bubble).
The most famous contrarian bet was Michael Burry’s now famous bet against the housing market in the mid-2000s, but there are other more counterintuitive contrarian bets that have been successful for a very long time.
Take cigarettes as an example. In the 1990s, the beginning of the end of tobacco was looming; smoking bans started in California and spread throughout America, then to the world; cigarette consumption, already on the fall from the peak in 1963, started to accelerate aggressively in 1990, so that by 2000 average cigarette consumption had fallen by 50%, versus a 30% decline from 1963 to 1990.
The trend has continued; in 2019, a Gallup poll saw just 15% of respondents had smoked cigarettes over the last week (it was 28% in 1990 and 40% in 1963).
Back in 1990, the obvious thing would have been to sell, even short Altria (MO), right? Well, no; not only did MO not go down, it’s up a shocking 116,000% since 1990–far better than the S&P 500, and almost as good as Apple (123,400%)! How is this possible?
There is a counterintuitive and simple explanation, and it stems from MO’s management. Seeing the writing on the wall, the company took steps to preserve investor capital even as it recognized the decline in cigarette smoking and the eventual cigarette-free future that humanity was moving towards. Some of this was morally dubious, such as aggressive marketing in emerging markets, where it could attract market share and hook new consumers on the addictive drug. Others were more to do with financial engineering, such as regular stock buybacks and large dividends, ensuring that the positive net profit margin found its way back to shareholders as much as possible. Another strategy was to downsize tobacco operations and diversify into other offerings: the company bought Kraft in 1988, General Foods in 1985, and SAB Miller in 2002.
Such moves provided an under-the-radar opportunity to improve shareholder value, resulting in significant returns thanks in large part to an incredibly low P/E ratio in the early 1990s (it was around 3 versus 19.6 today). And such moves were underappreciated by people who took the simple intuition of lower cigarette smoking and jumped to a conclusion on MO. Those who looked more deeply–the all-important process of due diligence–discovered an incredibly underpriced company, profiting handsomely as a result.