Contrarian Investor
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.
The contrarian strategy for Exchange Traded Funds (ETF) aims to invest in underpriced markets, which have a low value because they have lost the favor of the investors. The investments in such funds are made because they have a possibility of making a bullish comeback.
Related Terms
- Passive Investing
- Market cycle
- Progressive tax
- Correlation
- NFT
- Carbon credits
- Hyperinflation
- Hostile takeover
- Travel insurance
- Money market
- Dividend investing
- Digital Assets
- Coupon yield
- Counterparty
- Sharpe ratio
- Passive Investing
- Market cycle
- Progressive tax
- Correlation
- NFT
- Carbon credits
- Hyperinflation
- Hostile takeover
- Travel insurance
- Money market
- Dividend investing
- Digital Assets
- Coupon yield
- Counterparty
- Sharpe ratio
- Alpha and beta
- Alternative investments
- Investment advisory
- Wealth management
- Variable annuity
- Asset management
- Value of Land
- Investment Policy
- Investment Horizon
- Forward Contracts
- Equity Hedging
- Encumbrance
- Money Market Instruments
- Share Market
- Opening price
- Transfer of Shares
- Alternative investments
- Lumpsum
- Derivatives market
- Operating assets
- Hypothecation
- Accumulated dividend
- Assets under management
- Endowment
- Return on investment
- Investments
- Acceleration clause
- Heat maps
- Lock-in period
- Tranches
- Stock Keeping Unit
- Real Estate Investment Trusts
- Prospectus
- Turnover
- Tangible assets
- Preference Shares
- Open-ended investment company
- Standard deviation
- Independent financial adviser
- ESG investing
- Earnest Money
- Primary market
- Leveraged Loan
- Transferring assets
- Shares
- Fixed annuity
- Underlying asset
- Quick asset
- Portfolio
- Mutual fund
- Xenocurrency
- Bitcoin Mining
- Option contract
- Depreciation
- Inflation
- Cryptocurrency
- Options
- Asset
- Reinvestment option
- Capital appreciation
- Style Box
- Top-down Investing
- Trail commission
- Unit holder
- Yield curve
- Rebalancing
- Vesting
- Private equity
- Bull Market
- Absolute Return
- Leaseback
- Impact investing
- Venture Capital
- Buy limit
- Volatility
- Investment objective
- Annuity
- Sustainable investing
- Face-amount certificate
- Lipper ratings
- Investment stewardship
- Average accounting return
- Asset class
- Active management
- Breakpoint
- Expense ratio
- Bear market
- Annualised rate of return
- Hedging
- Equity options
- Dollar-Cost Averaging (DCA)
- Due Diligence
Most Popular Terms
Other Terms
- Homestead exemption
- Plan participant
- Performance appraisal
- Restricted strict unit
- Commingled funds
- Holding company
- Anaume pattern
- Harmonic mean
- Gordon growth model
- Income protection insurance
- Commodities trading
- Recession
- Federal Open Market Committee
- Trade sizing
- The barbell strategy
- Swing trading
- Savings Ratios
- Pump and dump
- Total Debt Servicing Ratio
- FIRE
- Debt to Asset Ratio
- Liquid Assets to Net Worth Ratio
- Liquidity Ratio
- Personal financial ratios
- Retirement Planning
- Credit spreads
- Taft-Hartley funds
- Stress test
- T-bills
- Stock quotes
- Applicable federal rate
- Assets under management
- Automated teller machine
- Payroll deduction plan
- Operating expenses
- Demand elasticity
- Interest rate risk
- Short Call
- Rho
- Put Option
- Premium
- Out of the money
- Option Chain
- Open Interest
- Long Put
- Long Call
- Intrinsic Value
- In the money
- Implied volatility
- Bull Put Spread
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