A portfolio to bet against the masses

Who is a contrarian investor?

Most private investors who pick stocks at least if you believe what they say when you ask them.

Who isnt a contrarian investor?

Well, by definition nearly everyone!

Contrarian investing means going against the consensus buying shares in a contrary fashion, as the name suggests.

It involves doing what feels unpopular at the very least, and often stupid or recklessly risky at worst.

If you dont feel like an idiot at least once a week about your portfolio, then youre probably not really a contrarian investor.

Clubbed to death

When youre a contrarian investor, youll usually find yourself buying companies that face obvious challenges.

Difficult external factors like a sector in a slump or an economic downturn, internal issues such as profit warnings, management bungling and botched execution the list goes on and on.

Alternatively you might be buying a company that you rarely even hear anything about, because everyone has forgotten it even exists and has left that corner of the market for dead.

Youre an ambulance chaser or youre a gravedigger. You can see why contrarian investing isnt the most glamorous way to put your money to work!

Why do so many people happily consider themselves contrarians these days, then?

Partly I think its a legacy of the financial crisis and the deep bear market that followed in 2008 and 2009. So many people were wrong about so much, and got burned so badly, that nobody wants to be seen trusting the system or the markets any more. It feels foolish.

I also think people get myopic, and underestimate groupthink.

Before the commodities sectors big slump, for instance, it seemed to me that most private investors I met were into small oil exploration companies and gold miners. They considered themselves contrarians, because (as they saw it) the rest of the market hadnt realised the world was about to run out of cheap oil, and because banks were destroying faith in flat currencies through low interest rates and quantitative easing.

The thing is, they all thought this!

It was very hard to argue with them if you suggested perhaps there was some froth in those sectors and maybe they should for instance look into some of the small-cap companies in other areas that had previously been popular with private investors, they looked at you almost pityingly, and then went back to talking among themselves about geological formations off the coast of West Africa.

Needless to say when the mining and energy mini-bubbles popped, an awful lot of supposedly contrarian private investors found themselves in the same sinking boat.

Today Id say investors in so-called quality companies particularly ones that do dull things like make soap or sell electricity are perhaps the biggest group who believe theyre doing something different but are really all in one very big boat.

They all believe theyve turned away from the glamour and growth in the market, and that theyre cunningly settling for slower and steadier growth, and the forgotten power of dividend reinvestment.

So many think the same thing that to me the sector has been bid up to unattractive levels.

A mini-portfolio of unpopular companies

Of course, I consider myself a contrarian investor, too. And no doubt I fool myself some of the time with this self-labelling.

But I do know that I am in disagreement enough both with other private investors and even with other Foolish colleagues that I must be doing something right.

(Or should that be wrong, from a contrarian perspective?)

I thought itd be fun, then, to give you an example of a mini-portfolio that a contrarian investor might buy today.

Ive picked five companies that all face headwinds, but which mostly also boast very decent yields as a result of their unpopularity.

Of course, received wisdom is that high yields are nearly always bad news, because they indicate companies in trouble (and which hence have depressed share prices) and uncertainty over the dividends.

But were being contrarian here, remember?

Company	Sector	Yield	Contrarian Cloud
BP (LSE:BP)	Energy	7%	Oil price slump
City of London Investment Group (LSE:CLIG)	Fund management	6.5%	Emerging markets
HSBC (LSE:HSBA)	Banking	7%	Low rates, China
Land Securities (LSE:LAND)	Commercial property	3.3%	Brexit
Persimmon (LSE:PSN)	House building	6%	Brexit, stamp duty changes

Will all five of these companies defy the doubters, maintain their dividends, and eventually go on to deliver strong capital gains when the clouds hanging over them drift away?

Unlikely, Id say. But thats not the goal.

You will never be all right, all the time

Picking troubled shares involves making mistakes just like any other facet of investing. So Id be very surprised if in 3-5 years we will be able to look back at this table and see a clean sheet of winners.

However, if one or even two of this fairly diversified group of companies cuts its dividend or otherwise stumbles along the way, the value thats potentially on offer with the group as a whole means to my mind a patient contrarian investor would have a decent chance of seeing an overall strong return.

Of course it wont be smooth sailing, but with an average yield of around 6% youre arguably being paid to take a bit of punishment while you wait for better times.

Besides, youll want to earn some battle scars in your quest to beat the market by fighting against the consensus.

Making a few bad bets is another sign that youre truly a contrarian investor.