Contrarian Investor

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:

  1. Don’t short and bet on failed companies. Wrong instincts can lead to huge losses.
  2. 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.
  3. 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.
  4. Avoid companies with high mismanaged debt as it could turn out to be risky in the future.
  5. 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

  1. 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.
  2. 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.
  3. 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.
  4. 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.

  1. 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.
  2. 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.
  3. 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

    Read the Latest Market Journal

    Weekly Updates 15/4/24 – 19/4/24

    Published on Apr 15, 2024 11 

    This weekly update is designed to help you stay informed and relate economic and company...

    From $50 to $100: Unveiling the Impact of Inflation

    Published on Apr 12, 2024 80 

    In recent years, inflation has become a hot topic, evoking strong emotions as the cost...

    Japan’s Economic Resurgence: Unveiling the Tailwinds Behind Nikkei 225’s Record Leap

    Published on Apr 11, 2024 62 

    Source: eSignal, Intercontinental Exchange, Inc. In the heart of Japan’s economic landscape, the Nikkei 225...

    Weekly Updates 8/4/24 – 12/4/24

    Published on Apr 8, 2024 98 

      This weekly update is designed to help you stay informed and relate economic and...

    What Makes Forex Trading Attractive?

    Published on Apr 2, 2024 179 

    In a world where the click of a button can send goods across oceans and...

    Weekly Updates 1/4/24 – 5/4/24

    Published on Apr 1, 2024 94 

    This weekly update is designed to help you stay informed and relate economic and company...

    How to soar higher with Positive Carry!

    Published on Mar 28, 2024 126 

    As US Fed interest rates are predicted to rise 6 times this year, it’s best...

    Why 2024 Offers A Small Window of Opportunity and How to Position Yourself to Capture It

    Published on Mar 28, 2024 174 

    With the Federal Reserve (FED) finally indicating rate cuts in 2024, we witnessed a significant...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you

    IMPORTANT INFORMATION

    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  

     

    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com