For all that is written on the topic, the key to beating the market can be boiled down to a single concept: variant perception. In order to earn a return that is different from the market average, you need to do different things, based on views that different from the consensus. Here are some of the best contrarian articles I read this week:
Sentiment is extremely bullish
Barron's venerable curmudgeon Alan Abelson is concerned about the tone of the market [free registration be required]:
The upbeat contingent, rarely absent, is beginning to swell noticeably, as affirmed by even the most casual perusal of the tide of opinion sweeping over the recommendations of sell-side analysts and strategists. Investors Intelligence's latest survey of advisory opinion shows bulls have forged sharply ahead of bears by the largest margin -- 54.7% versus 21.1% of those responding -- since April 20, 2012, while bullish sentiment among members of the American Association of Individual Investors, a more skittish bunch, has ballooned to 42.8%, versus 29.6% bearish, the rest being on the fence but, it seems, increasingly eager to take the plunge. These are both contrary indicators, and they become actionable pretty much only at extremes.
But what for a lack of a more precise description we may call the "feel'' of the market lends credence to the notion writ large in the sentiment numbers that it's primed for a shock. At the very least we'd prescribe taking some money off the table while the taking is easy.
One contrarian indicator in the red
In fact, Business Insider's Joe Weisenthal notes that investors are more bullish than in 99% of all periods since 2002:
The current [Bank of America Merrill Lynch Bull & Bear Index] reading is 9.6 (on a scale of 0 for max bearish and 10 for max bullish). It suggests investor sentiment is currently more bullish than 99% of all readings since 2002. Extreme bullishness is characterized by robust inflows to EM equity funds, overbought high-yield credit markets relative to treasuries and aggressive hedge fund positions for a weaker yen and stronger oil prices.
A long way from the top
All the same, while we may be less than 3% from the all-time high closing price for the S&P 500 (SNPINDEX: ^GSPC ) , Kopin Tan of Barron's is keen to remind us [free registration may be required]:
As we keep our eyes peeled for euphoria, it helps to remember that, adjusted for inflation, the S&P 500 will need to reach 2,026 to surpass its former peak, says Doug Ramsey of the Leuthold Group. Price the stock market in Swiss francs or gold and we're roughly 48% or 84% away, respectively, from a new record. It's enough to not get too carried away, for now.
Overheated market or opportunity?
While junk bonds have grown extremely popular with individual investors via products such as the iShares iBoxx $High Yield Corporate Bond Fund ETF (NYSEMKT: HYG ) or the SPDR Barclays High Yield Bond ETF (NYSEMKT: JNK ) , Research Affiliates CEO Rob Arnott's sanguine outlook for this segment of the bond market is becoming increasingly contrarian among professional investors. In this video interview, Arnott explains himself:
Even high-yield bonds, which a lot of folks have decried as a bubble. Yes, the yields are the lowest ever -- look anywhere in the bond market and find something where the yields aren't very close to the lowest ever. The spreads [over Treasury yields] are in line with historic norms, and if you've got a government that believes deeply in the mythos of "too big to fail" and a Fed that believes deeply in the notion of propping up the economy and propping up the stock market with monetary stimulus, then default rates may be well below historic norms with a spread that's in line with historic norms. That makes high-yield bonds somewhat interesting.
To dream the impossible dream
The Financial Times' John Plender highlights a gross inconsistency [free registration may be required] in the expectations of U.S. pension fund managers:
This is low by any standard. It suggests that investors who expect to beat inflation by 6, 7 or even 8 per cent over the long run are wildly optimistic. Pension plans, say Messrs Dimson, Marsh and Staunton, are also too sanguine, especially in the US. The average expected return on plan assets at S&P 500 companies is 7.6 per cent. Meanwhile, the proportion of equities held has fallen to 48 per cent. Given low current fixed interest yields, plan sponsors need equity returns of about 12.5 per cent nominal or 10 per cent real to meet such targets. US public pension plans have even higher projections. They are all living in a Panglossian cloud cuckoo land.
Enjoy your long weekend, contrarian Fools!
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