What Is Contrarian Investing?

This post was published on the now-closed HuffPost Contributor platform. Contributors control their own work and posted freely to our site. If you need to flag this entry as abusive, send us an email.

Do not try to be a contrarian, if it feels like you constantly have to make an effort then you fall under the “fashion contrarian” category. This usually happens because you woke up one day, read a random article on the subject, it tickled your fancy and there and then you decided that this was something cool. Contrarian investing is not about being cool, it is about doing stuff that is not cool. Hence being fashionable goes against everything a true contrarian stands for. This is why we continously stated this Stock Market Bull would surge to heights that would shock even the most ardent of bulls years in advance of the event.

Your focus should be on standing apart from the crowd; doing things that the group does not find fashionable or acceptable. Regarding investing, this means getting into investments that are not considered hip or that is not on the crowd’s radar screen. This saying we coined is apt for this occasion

“Be wary when the crowd is joyful and happy when they are not”

Fashion contrarians embrace anything so-called contrarian websites publish. These websites focus on sectors that are already in play; in other words, the trend is mature. Contrarians get into a sector when it is being completely ignored by the masses. Understand the main principles of contrarian investing that outlined below. After that you will have to weed out the riff from the raff; set aside some time each week to look for sites that focus on ideas that are not too popular. If it’s too popular, it means that you are coming in towards the end of the party.

If you combine the concept of contrarian investing with mass psychology, you can further improve your odds of winning in the markets. There is no such thing as a guaranteed investment; investing caries a risk but one can signficantly mimize one’s risks by being prudent and following the guidelines laid out below.

The Main Contarian Investing principles to keep in mind

  1. Do not follow popular media; if you are trying to get investment ideas from these sources, 9 out of 10 times, you are going to lose money. These sources should serve as guidelines for what investments to avoid as opposed to getting into
  2. Do attempt to find company; in other words, you should be a loner when it comes to taking a position. If you are seeking approval from the crowds, then most likely you are making the wrong decision.
  3. Do not speculate; contrarians do not speculate until they made money and even they are careful about doing so. Only use profits to speculate and only deploy small amounts of capital into speculative investments.
  4. Do not fixate on fundamentals as this data is available to everyone in a standard format. Unless you spot something unique, the millions of eyeballs reading the same data will all draw the same conclusion. In essence, if you take this route, you are more likely to be part of the crowd as opposed to standing apart from it.
  5. Do not buy the Warren Buffet nonsense mantra of buy and hold until the end. You will never get the special deals he gets and he is playing with other people’s money and you are not. There is no such things like buy and hold forever. There is buy and hold for some time and then fold and open a new position
  6. Do not fall in love with your investment or get emotional over your position. You need to be indifferent; it’s just a piece of paper and when the time comes you close the position and move onto greener pastures.
  7. Unlike a fashion contrarian, contrarian investor tends to focus on turnaround situations. In other words, a new trend is about to begin or end (more aggressive contrarians will short stocks and the market when the trend changes). One of the key things they look for is well-financed companies, that are growing at a decent rate and that the markets are undervaluing for the wrong reasons. The masses are either ignoring these stocks or openly dislike them.
  8. Contrarian investing is a stable form of investing; contrarian investors do not rely on experts to help them arrive at a decision. They already know what they want and when they spot it, they methodically start to open positions in that stock. Again there is no room for emotions.

Originally posted at the Tactical Investor

Before You Go

Popular in the Community