Table of Contents
- What is a Contrarian Investor?
- Characteristics of contrarian investors
- Contrarian investing vs value investing
- Examples of contrarian investors
- Frequently Asked Questions
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
What is a contrarian perspective?
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.
What is a contrarian ETF?
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.
FAQs
By going against popular opinion, contrarian investors aim to capitalize on mispriced assets, buying when others are selling and vice versa. This approach requires independent thinking, careful analysis, and a willingness to withstand short-term market fluctuations.
What is an example of a contrarian investor? ›
By going against the grain, contrarian investors may be able to reap big gains, as long as they have the time and patience to wait out their prediction. For example, one popular contrarian strategy is to invest in stocks during the midst of a bear market, or when stock prices are falling.
What are contrarian indicators? ›
Contrarian indicators, such as extreme levels of optimism or pessimism, can help identify market bubbles, where asset prices have become detached from their fundamental value.
Is contrarian investing risky? ›
Note that contrarian investing can be risky. Areas are often out of favor for a reason, such as a history of underperformance. Contrarian investment ideas may continue to underperform for extended periods.
What is the characteristic of investor? ›
What Qualities Make a Good Investor? To be a successful investor, a certain set of skills are required. These include diligence, patience, acquisition of knowledge, risk management, discipline, optimism, and the setting of goals.
What are the characteristics of a contrarian investor? ›
Thorough Market Research: Contrarian investors dedicate extensive time to in-depth market research, comprehensively analyzing trends and investor sentiments. 2. Patience is Key: This strategy demands considerable patience. Contrarians defy prevailing market trends and maintain composure, unwavering in their decisions.
What makes someone a contrarian? ›
A contrarian is someone who goes against prevailing opinions and trends. Being contrarian is about knowing when to go against the grain and when to go with the flow. “The key is to think independently, not just differently” (Shakir). The contrarian mindset is about being comfortable with discomfort.
What is the best contrarian indicator? ›
Perhaps the most popular contrarian stock trading indicator is investor sentiment. Investor sentiment is a measure of how optimistic or pessimistic other investors are feeling. Overly bullish investor sentiment is often considered to be a bearish contrarian indicator.
Is being a contrarian good or bad? ›
There are various synonyms for contrarianism, some positive, some neutral, some distinctly negative. Contrarians may be seen as courageous, unconventional, counterintuitive thinkers, able to withstand herding pressures and even abuse from crowd-following conformists… Some rejoice in the title while others shun it.
What is the opposite of a contrarian investor? ›
Trend-followers are those investors who buy stocks when the price is high and sell them when the price of a stock falls. However, contrarian investors trade oppositely. They buy the stock when the price is low and sell them when the price is high.
Thus, a contrarian strategy can be profitable since the upside can be enormous. Many contrarian investments have the possibility of asymmetric returns—that is, a large potential upside with a limited and measurable negative.
What is the contrarian trading rule? ›
Contrarian investors believe that people who say the market is going up do so only when they are fully invested and have no further purchasing power. At this point, the market is at a peak. So, when people predict a downturn, they have already sold out, and the market can only go up at this point.
What is a contrarian buy signal? ›
Rather, a contrarian seeks opportunities to buy or sell specific investments when the majority of investors appear to be doing the opposite, to the point where that investment has become mispriced.
What is investor personality? ›
Investor personality analyses the factors that influence your financial behaviour, and helps you outperform by building a portfolio that matches your risk profile and personality. Above-average financial mastery, comfortable taking more risk than others, low overconfidence levels.
What is the mentality of an investor? ›
The Traits of a Good Investor
A good investor understands that success is not built overnight. They are willing to hold onto their investments through market fluctuations, avoiding knee-jerk reactions driven by short-term volatility. Patience allows them to benefit from the compounding effect over time.
What is the mindset of an investor? ›
Just remember: the mindset of an investor is a combination of vision, discipline, resilience, and continuous learning. Beyond mere buying and selling, successful investors embody a strategic approach that enables them to navigate the complexities of the financial markets.
What type of investor is Warren Buffett? ›
He is noted for his adherence to the principles of value investing, and his frugality despite his wealth. Buffett has pledged to give away 99 percent of his fortune to philanthropic causes, primarily via the Bill & Melinda Gates Foundation.
Is Contrarian investing profitable? ›
Thus, a contrarian strategy can be profitable since the upside can be enormous. Many contrarian investments have the possibility of asymmetric returns—that is, a large potential upside with a limited and measurable negative.
What is an example of a direct investor? ›
A foreign subsidiary may provide goods to the parent company and receive services from the headquarters—a clear example of vertical direct investment. But the same subsidiary may also supply the local market, as part of the parent company's horizontal direct investment strategy.
