Table of Contents
Who Is A Contrarian Investor?
By selling when others are buying and buying when others are selling, investors who practice contrarian investing aim to generate profits by going against the general market trend.
Contrarian investing is a long-term approach. It is an investment technique in which investors actively ignore market trends by selling while others buy, and vice versa. Contrarian investors share the opinion that those who argue that the market is moving upward do so only when they have no more purchasing power and are fully invested.
During this period, the market is at its pinnacle. Hence, when the market moves downward, those who believed that it was going up have already sold off their shares, and the market can only go up at this moment.
In the financial markets, the herd mentality typically wins out. Many investors think the stock market is doing well and will continue rising, or they believe the market is in crisis and will be lower next week than it is now.
How Contrarian Trading Works:
Understanding conventional thinking in great detail is the first step toward contrarian investment. This may apply to an individual stock, a broader stock market sector, or the market itself. A contrarian investor then seeks weaknesses in the consensus and creates a case to support their contrarian perspective.
A contrarian investor could build a “bear case” for the market as a whole or for certain sectors within it, for instance, if the majority view is a “bull case” for the stock market based on increased economic growth.
A contrarian investor might also be positive, while pessimistic ideas are alluring. This is especially true for individual equities or stock markets that have lost favor. For instance, hedge funds, which pool investor money, usually hunt for aggressive contrarian investing approaches.
Investors that take a contrarian approach do not desire immediate gains. The goal is to seek areas of opportunity inside the market where they think the common thinking is erroneous in the hopes that their investment will succeed when other investors change their perspectives.
Investors who take a contrarian attitude must thus be prepared to bear short-term losses as well as the uncertainty that comes with waiting for the validation of their idea.
How to spot a potential Contrarian opportunity?
The best way for contrarian investors to detect a possible contrarian opportunity is by assessing the broader market trend and investor opinions.
For example, if you think you are reading constant news about the market or a stock that is likely to climb, it might be a good starting point for you to conduct contrarian investing. In the long term, it is practically likely that every stock will move to its real value, whether up or down.
If some stocks are in the news, it makes them hot stocks. You may then start monitoring them and undertaking extensive technical and fundamental analysis to discover their genuine value.
As there is a risk that investors may overreact, you will witness a quick surge in the prices of these equities. Once they are at their height, you may wait for them to collapse and then enter by buying these stocks at a low price. As they move toward their genuine worth, you will generate money.
Or, in simple words, “Buy Low, Sell High” and “Buy When Others are Selling, and vice versa.”
Contrarian Investing Characteristics:
The following qualities separate contrarian investing from other investment strategies:
Investors should constantly consider the long term. Contrarian investors select equities that are bearish in the present but have the potential to hit record-high peaks in the future.
Attention to detail is necessary. Traders should regularly watch swings in the market and invest in assets. If a stock deviates from predicted expectations, contrarians must make early moves to reduce the loss. This is where we use “stop loss.”
Intensive Market Research
Contrarian investors spend time analyzing market trends—they thoroughly investigate investor attitudes toward the changing market trend.
When everyone is retreating from a collapsing stock market, contrarian investors arrive and stay with the trend. Therefore, individuals must keep cool and remain invested without reconsidering any drastic measures.
These investors go against the normal practice—they have an alternative method of evaluating investment prospects. This is feasible because they make independent decisions.
In contrarian investment, natural disasters, pandemics, and economic downturns are considered opportunities. These occurrences have a rapid influence on stock values. Prices rebound when the problem is brought under control.
Benefits of Contrarian Investing:
The following are some of the benefits of being a contrarian investor;
Investing in undervalued assets can reap big rewards over time as the market adjusts. Contrarian investors can uncover opportunities when the market has not yet appreciated the actual worth of investment, resulting in potentially huge returns down the line.
By investing against the trend, you may acquire things inexpensively and then sell them when the market ultimately realizes their actual worth.
One of the key benefits of contrarian investing is that it provides an excellent tool for diversifying your portfolio and lowering overall risk.
By investing in assets that are undervalued or unpopular in the market, contrarian investors are able to counter the risks associated with mainstream investments. This strategy helps to disperse risk and prevent a concentrated portfolio in any one asset type.
Avoid Correction & Market Crash
Investing against the consensus can help investors avoid market corrections or even crashes at times and other unpredictable market scenarios by following the herd. When everyone is investing in a given asset class, its valuations tend to get inflated, making it harder to produce long-term returns.
Contrarian investors can buy up these assets when everyone else is selling, by waiting for the market to correct itself.
Follow the Trend
To be successful with contrarian investing, you need to be able to detect patterns and market mispricing. This entails undertaking rigorous investigation and analysis to reliably find undervalued assets.
Knowing how to recognize trends early and capitalize on them before others perceive the benefit is crucial. Successful contrarian investing demands a long-term outlook and the determination to cling to investments even in the face of short-term failures.
Investing against the consensus helps investors reap huge long-term rewards as market trends inevitably shift. The market typically overreacts to changes in the short term; it just takes time to stabilize.
By taking advantage of market inefficiencies and spotting discounted investments, contrarian investors may reap the rewards of their patience and dedication.
Disadvantages of Contrarian Investing:
Developing a contrarian stance demands a lot of curiosity and independent thinking, coupled with the time necessary to examine how particular companies, volatile stocks, sectors, or even the market as a whole trade.
There’s a level of discipline that’s required of contrarian investors to maintain an out-of-consensus stance, particularly if investors must wait some time to see if their idea is accurate. Contrarian investors must have both the time and money to wait, particularly because they might face some short-term underperformance in pursuit of their contrarian approach paying off.
There’s an opportunity cost to tying up money in a contrarian approach that may take months to come to fruition, and investors must be OK with this sort of risk.
Contrarian investing is also not as reachable for most investors as other investment techniques, given the time and study necessary to create good contrarian hypotheses. The thought of proving other investors wrong is alluring, but it’s tough to perfectly time the buying and selling that’s needed for the contrarian approach.
Top Contrarian Investors:
Some of the world’s finest Investors are all in some sense a contrarians. Here, are some of the big names;
- Shri Rakesh Jhunjhunwala
- Benjamin Graham
- George Soros
- Warren Buffett
- Bill Ackman
“Be fearful when others are greedy, and greedy when others are fearful”. This is a comment from Warren Buffett, one of the finest investors of all time, and it accurately explains the notion of contrarian investment.
However, at its core, contrarian investment can be harmful if it is not accompanied by extensive study through technical and fundamental analysis. Only then can you learn about the actual worth of a stock and successfully implement contrarian investment techniques.
Disclaimer: All the information on this website is published in good faith and for general information purposes only.