Table of Contents
What is a Contrarian Investor?
Contrarian investing is a strategy where investors go against the tide of prevailing market trends on purpose. Therefore, they sell when other investors are buying and buy when others are selling.
It is more about self-discipline than intelligence.
Warren Buffett was known to be a contrarian investor from his initial days of investing.
The concept behind going against the tide is that such investors believe that the market runs on speculation and emotions, and investors who predict that the market will go up, do so when they are fully invested in the market and have no purchasing power left.
Hence, for them the market has reached its pinnacle.
So, people sell their investments and predict a downturn but the market eventually goes up after that point.
This strategy is kind of a reward for being patient, confident, and rational with a hope of earning high returns.
Successful investors have applied this strategy to earn outsized gains from the market.
Contrarians follow the below mentioned rules to make the most gains from this strategy:
- Don’t short and bet on failed companies. Wrong instincts can lead to huge losses.
- Keep the current portfolio debt-free which will allow one to ride out the low phase of the market. Margin should not be normally used, but it can be used in case of a good investment opportunity.
- Focus on companies which have a competitive advantage against competitors like economies of scale, brand recall, network effects, cost advantages, prime real estate locations, patents, etc.
- Avoid companies with high mismanaged debt as it could turn out to be risky in the future.
- Diversify your portfolio appropriately by investing in various funds and stocks across different sectors, companies, geographies, and asset classes. This reduces the probability of losing capital in a short duration of time.
Characteristics of contrarian investors
- Contrarian investors are mainly divided in two categories where one portion believes in a permanent bear market view, while the other bets on the market eventually going up.
- They seek opportunities to sell or buy those investments which may be having a good run or not; but it would be opposite to the current investor trend.
- They tend to focus on buying distressed stocks and then selling them off once the share price has recovered and before other investors join in.
- They don’t believe in the herd mentality idea and believe that it is actually a bad investing strategy.
Contrarian investing vs value investing
Contrarian investing and value investing are basically similar in essence as both seek stocks whose share price is lower than the intrinsic value of the company. Value investors follow the belief that the market overreacts to any kind of news, which may be good or bad. Hence, fluctuations in the stock price of a company in the short term is not necessarily the reflection of a company’s long-term core values. Both strategies buy undervalued securities during a downward market and then sell them after recovery to make a profit by analyzing the current market sentiments and doing the opposite.
But contrarian investors are open to trading with stocks below their company’s intrinsic values for a long duration of time due to unfavorable market trends.
Examples of contrarian investors
Some well-known contrarian investors who have made profits by going against the tide are Keith Bill, Michael Lee-Chin and Jim Rogers among others.
- Warren Buffett: He follows his own advice which says be fearful when others are greedy and be greedy when others are fearful. He has been following these contrarian tendencies for investment since the beginning of his career.
- Bill Ackman: Bill Ackman is the founder of Pershing Square Capital. He is known for short-selling famous companies and investing in unfavorable stocks. He tends to use his own firm’s stock holdings to influence other companies to make relevant changes.
- Michael Burry: Michael Burry is mostly known for betting against the subprime mortgage market in mid-2000. He is a well-known contrarian investor and also has a book and movie to his credit, which is called The Big Short. He has a hedge fund called Scion Asset Management, which is used to make contrarian investments in the market.
Frequently Asked Questions
A contrarian perspective involves believing that most public opinion is wrong and based on limited information, personal beliefs and interests. People with this perspective believe in going against the tide and make decisions based on research and analysis of the current trends. This term is mainly used in investing. Successful contrarians believe in the concept of buying low and selling high. The concept entails buying cheap stocks that have the possibility of rising, and selling expensive stocks that have the possibility of declining in the future.
Most Popular Terms
Read the Latest Market Journal
There has always been a debate in the investing community about whether active or passive...
Start trading on POEMS! Open a free account here! The three US major indices –...
In this article, we will explore the idea of Short Selling: Legendary Trades done by...
A common concern among investors with regard to home bias is that they are earning...
Start trading on POEMS! Open a free account here! At a glance: Rate hike of...
Regardless of whether you are planning for retirement, saving for your children, or attaining that...
Planning to ride on the re-opening of Singapore’s borders? Which sectors should you invest in?...
With China beginning to relax its COVID-19 measures, is now the right time to start...