What is contrarian investing?
Be fearful when others are greedy and to be greedy when others are fearful. -Warren Buffett
Hi investors. Welcome to the day 26 of my ’30 days 30 posts’ challenge. In this post, I am going to discuss one of the less-talked topic- ‘What is contrarian investing?’. And why it is difficult to be a contrarian investor?
You might have heard about value investing, growth investing, Intraday trading, Swing trading etc. However, have you heard about contrarian investing? If not, then you are going to learn about it in this post. Let’s get started.
What is contrarian Investing?
Contrarian investing is the ideology in which an investor attempts to make profits by making his decision against the popular consensus but only when the conventional wisdom appears to be wrong.
A contrarian investor moves against mass psychology and looks for an opportunity of mispricing of the stocks due to consensual opinion. They believe in betting against the crowd.
When the stock prices are down and the people are bearish, contrarian investors find good opportunity to buy the under-priced stocks.
When the stock prices are high and the people are bullish, a contrarian investor tends to sell his stocks as he finds it over-priced and believes to make a good profit by selling it at that time.
A contrarian investor likes to invest opposite of the trends and what the majority are doing. He believes in taking advantage of the temporary mispricing of the stock by the masses.
By choosing out of the favor stocks, a contrarian investor tends to make a profit by following the same old strategy of buy low and sell high.
How are contrarian investors different from value investors?
A contrarian investor is very similar to the value investor as both tend to look for undervalued stocks. However, the basic difference between both of them is: A value investor buys/sell stocks purely based on the fundamental analysis. Whereas, a contrarian investor also cares about volume trading, analyst forecast, and media commentary.
Why it’s difficult to be a contrarian investor?
There are very few true contrarian investor in the market. This is because a contrarian investor looks stupid most of the time when they take the decision opposite to the common thinking or what the majority are doing. Moreover, in the case when the trend changes and they turned out to be correct, the contrarian investors are just referred as the ‘lucky’ ones.
Here are few more reasons why it’s difficult to be a contrarian investor:
1. Herd mentality: When everyone is buying/selling a stock, it takes a lot of courage to do the opposite of the crowd.
If everyone is buying a stock whose share price is continuously increasing for the last 1 year, then its really hard to ignore that stock. Similarly, when the price of a stock starts falling at a high pace, it’s tough to hold that stock or buy more.
2.Group thinking: Most people are okay with a stock that is not performing if everyone else is also holding that stock. However, buying a non-performing stock (that no one in their group is buying) gives them a headache. Looking at what others are buying/selling and doing the same as their group, makes people more confident than doing the opposite and being a contrarian investor.
3. Following the veterans: Watching one of a big investor or a big institution buying/selling a stock attracts a common investor as they see them as a sign of authority. On the other hand, a contrarian investor tends to think opposite and hence doesn’t find any authority support or a social proof for their investment decision.
4. Short term losses: A contrarian investor has to suffer short-term losses and sometimes these losses may extend to years until the trend is reversed. Most of the common investors can’t see their portfolio in losses when others are making money and hence ignores the contrarian investors philosophy.
Contrarian investing is one of the most successful investment approaches over the long term. Warren Buffett, one of the richest investor of this time, follows this approach which itself validates the power of contrarian investing.
A contrarian investor tends to get maximum benefits of both good and bad market. Although it’s difficult to go against the crowd, however, if you are confident about your analysis, then following contrarian investing approach can make wonders for your investments.
That’s all for this post. I hope this is useful to the readers.
If you have any questions, please comment below. I will be happy to help.