Contrarian investing is, in concept, one of the simplest
things in the world. It says that the masses are idiots and are always wrong; therefore, doing exactly the opposite of the masses is the
correct thing to do.
The problem with contrarian investing is that the masses are
sometimes right.
In 1985, faced with high interest rates, the masses said
that interest rates could still go higher (and long-term bond prices
lower) – and they were right. In 2009, despite falling markets and great
valuations, the masses said that stocks would still go lower – and they were
right. Doing the opposite of what the
crowd recommends isn’t always the best course of action.
And yet, contrarian investing works, largely because people
make investment decisions based on emotions rather than logic. Case in point: CEO Jamie Dimon's annual newsletter, released Wednesday.
In the newsletter, Dimon pointed out that JP Morgan Chase had record earnings
of $19 billion last year (that’s the best year ever). He added that the earnings would have been even better if it had
not been for still-high mortgage related losses. As time has gone forward, these losses have been
declining.
Most interestingly, Dimon hinted that the price of JP Morgan
stock was likely low because of “hostility” toward him and to the banking
sector in general. Based on the
comments seen after the newsletter was released, Dimon is right: he was called
a “criminal,” “manipulator,” “slime ball,” etc.
By now, I’m sure Dimon is immune to such disparaging
remarks. As a banker myself, I
occasionally have clients tell me that they “hate banks,” which I consider a
polite (weak?) way of saying, “I hate you.”
Then again, I also have people tell me that I’m wonderful but that they
hate bankers: is that a compliment or an insult??
Emotions aside, here are the facts that investors should be
interested in:
-
Record earnings of $17 billion, up from $12 billion in 2009.
-
Return on equity of 15% (which Dimon thought was low).
-
Market share growth in almost every area.
-
Approved to implement stock buybacks.
-
Opening 120 to 200 new branches a year.
There are many headwinds in banking, to be sure, including new regulations, housing weakness, and worldwide economic uncertainly. But none of these are reasons to not buy a company.
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“We all have a vested interest in getting this right.”
Jamie Dimon
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