In the world of investing, everyone wants to be a contrarian but few really are.  It appears that the herding instinct is deeply embedded in the human psyche; at our cores we need the acceptance and approval of others.  Going against the crowd is scary and leaves you with a feeling of vulnerability.

It makes sense, of course.  Our primitive ancestors learned quickly that there is strength in numbers when it came to hunting and in defending hunting grounds from would-be competing groups.  A single hunter would have quite a hard time taking down a wooly mammoth, and if he did he would have an even harder time fighting off competing hunters.  For humans, learning to function as a group was a means for survival.  (If you need any evidence that the primitive tribal instinct has yet to be bred out of us modern humans, try watching a World Cup soccer game.  Alas, we really haven’t evolved much as a species.)

But while the herding instinct made sense in earlier eras, it can be absolutely disastrous to us in the modern age as investors.  The herding instinct often causes us to choose our investments based on what others are choosing rather than based on the actual investment merits of the assets in question.  A brief moment of reflection would have told you that buying condos on Miami Beach in 2005 was a bad idea.  The same is true of Internet  stocks during the bubble years of the late 1990s.  Unfortunately, the fear of being left behind by the group has convinced millions of otherwise sane investors over the centuries to throw their rationality to the wind and make investment decisions they would soon regret. 

With the possible exception of gold, there are no major asset bubbles today.  This does not mean that herding has disappeared, however.  Herding can also be found within asset classes.  In the case of the stock market investors routinely shift their favor from sector to sector.  This causes certain sectors to become overpriced and underpriced relative to the others. 

One of my favorite ways to spot herding behavior is to watch surveys published by major financial magazines.  Consider Barron’s Big Money survey, which polls a large number of institutional money managers. 

Money managers naturally “talk their book.”  In other words, if a manager likes a given sector, chances are good that he or she has already invested heavily in it.  Otherwise, why would they telegraph their best investment ideas to potential competitors?

Take a look at Figure 1, which shows the Big Money picks for the best- and worst-performing sectors for the next six to 12 months.  I like to look for uniformity of opinion.  Sometimes, the herd is right, of course.  Favored sectors are favored for a reason, and unfavored sectors are shunned for a reason.  But often times the market overshoots and creates profitable contrarian opportunities for us.  The key is to find instances where there is uniformity of opinion and the assumptions used are flawed.

So, with that in mind, how does the big money shape up?

The bullishness towards technology is the first thing to jump off the page. Bullishness on that sector is more than double the next closest sector, and bearishness is all but nil.  Meanwhile, look at utilities.  Utilities have the smallest bullish following and have the second largest bearish following.  Sentiment towards consumer cyclicals is also disproportionately bearish. 

(You might ask why I skipped financials.  Though financials have the most extreme bearishness, they also have a decent-sized bullish following.  Opinion on this sector is too mixed to draw conclusions.)

So, the Big Money is telling us that 2011 should be a great year for technology and a bad year for utilities.  As contrarians, we need to ask ourselves:  what would cause this to not be true?

I have a one-word answer: dividends.

Investors today are hungry for yield.  Bond yields are at historic lows, and savings accounts and CDs yield virtually nothing.  In contrast, stocks, and utilities in particular, are sporting dividend yields not seen in a long time.  With few exceptions, such as Intel (NASDAQ:

INTC), tech companies pay paltry dividends.

Rising interest rates would hurt yield-sensitive investments like utilities.  But given that a full 95% of the managers interviewed in the Big Money survey are bearish or neutral on U.S. Treasurys, the contrarian in me believes that Treasury yields could stay low for much longer than most investors think.

My dark-horse pick for best performing sector in 2011 is utilities (NYSE: XLU).  Normally I might recommend a pair trade in which investors go long utilities and short technology.  But given their current cheap valuations, I hesitate to bet against tech stocks.  Instead, I recommend that investors simply overweight the utilities sector relative to tech.

If I am wrong, investors might miss out on modest capital gains in the tech sector.  But if I am right, investors could get a pleasant surprise as they enjoy handsome capital gains and high current income in the staid, boring utilities sector. 

Charles Lewis Sizemore, CFA, is Editor of the Sizemore Investment Letter.