Contrarian investing means shunning market trends and hyped investment and going against the flow, i.e. while the majority of people are buying the contrarian investor sells, and while people sell he or she buys.
Contrarian investing is done by people who see investors jumping into a hot stock and chasing after gains as a reason to avoid that stock completely.
The contrarian investor believes that if shares of a company are being bought by many people, they will rapidly become overbought and soon stop reflecting the actual strength of the business – inevitably, the share price will drop.
Contrarian investing also responds to widespread pessimism in the market by buying stocks that have been driven so low that they overstate a company’s risks, and understate its chances of making a comeback.
Contrarian investing means being a bull in a market full of bears, going up when everybody is going down, or swimming against the current.
Spotting and buying such distressed stocks, and selling them when the business recovers, can lead to strong gains.
The general principles used in contrarian investing can be applied to individual stocks, a whole industry sector, or an entire market.
Contrarian investing requires good research and impartiality
To be a successful contrarian investor, you need to research your market carefully, and be impartial and disciplined.
Take your time while checking out companies you are considering investing in. Look out for a solid management team, good profit margins, efficient processes, and innovative products.
Businesses that can maintain these fundamentals can withstand economic downturns and investor reluctance.
Warren Buffett, arguably the best ever contrarian investor, has built a massive fortune by going against popular wisdom. At the height of the financial crisis he bought Goldman Sachs.
Mr. Buffett once said regarding contrarian investing:
“Be fearful when others are greedy and be greedy when others are fearful.”
In some ways, contrarian investing is similar to value investing in that the investor is looking for mispriced investments and purchasing those that are seemingly undervalued by the market.
Video – Making money through contrarian investing