What is Contrarian Investing?

by Miranda Marquit · 4 comments

One of the terms that you might have come across as an investor is “contrarian.” In some cases, the savvy contrarian investor can make money by engaging in strategies, and making investment moves, that are considered different than the conventional wisdom.

A contrarian investor can take advantage of situations that allow them to position themselves to make more money later. By going against the grain, a contrarian accesses opportunities that the crowd doesn’t see. It may seem like a foolish move in the eyes of most people, but the move might pay off handsomely at a later date.

Examples of Contrarian Investing

The defining characteristic of contrarian investing is that it goes against the grain of what everyone else is doing at the time. A contrarian bucks what is considered “conventional wisdom” in his or her investing decisions. Some examples of contrarian investing include:

  • Buying an investment that everyone has written off as practically worthless. The contrarian might see some value in it, and believe that the market has undervalued it. Later, the investment could recover to some degree, and the contrarian can sell at a profit.
  • Shorting an investment that others think is great. Rather than buying into what he or she perceives as hype around a climbing investment, he or she might short-sell it in an effort to make a profit when the ride is over and the investment tanks.
  • Bear market view. This is the idea that stock market (or other market) is on the verge of dropping — even though most other investors assume that it will rise higher. As a result, the contrarian can enter a position that is beneficial when things change.
  • Using the VIX to determine when good opportunities to buy arise (when there are peaks).
  • Recognizing that a high dividend yield could be brought on by plunging share prices, and buying at a discount.

A contrarian believes that so many investors are doing the same thing, and the result is that the investment (or asset class, or industry, or sector) is mispriced — possibly by a large margin. The idea, then, is to take advantage of the difference between the market value of the investment and its “true” value. As a result, the contrarian appears to be doing the opposite of what most other investors are doing. If the contrarian is right, though, the results are often good profits.

Research and Contrarian Investing

Of course, with contrarian investing there is the chance of loss. You could be wrong, and the crowd could be right. Or, you might not enter or exit a position at an ideal time. In any case, it’s important to research your choices as a contrarian investor. Just doing something because the crowd is doing something else, and not paying attention to some of the technical and fundamental features of an investment, can result in trouble. It’s important to carefully research your options, and make an informed decision.

Ultimately, contrarian investing is about finding value in what a majority of others dismiss (for this reason, there are some that feel contrarian investing doesn’t truly exist; it is merely another term for value investing). This requires that you study the investment, and determine whether it truly has been mispriced, and whether it is likely to provide gains in the future.

David’s Note: For most people, we really believe the best way to invest is through passive index funds. But if you’ve tried to be a contraian investor before, what were your experiences?

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{ read the comments below or add one }

  • I mainly follow passive investment strategies myself, but do have some play money that I use for fun. I primarily look for companies that I think are still strong, but for whatever the reason, the market has written them off. My results are mixed. I’ve invested in a few that have lost money and have invested in a few that have tripled in value. My lesson: it’s a crap-shoot. You can only make an educated guess and hope you guessed right.

  • Derek says:

    Warren Buffet was the ultimate contrarian and followed the rule “Be fearful when others are greedy, and be greedy when others are fearful.” This approach certainly hasn’t hurt his approach to investing. Great post.

  • I think this is probably the best article I have read all year, I genuinely mean it. How often do we explore that following the consensus on financial investments/saving or planning isn’t always best, especially as it’s unlikely we’ll get the best returns by doing so.

  • One thing about contrarian investing is that it certainly forces you to “buy low, sell high.” By doing the opposite of what the majority are doing you will avoid getting caught up in the next big bubble. There is always the risk that you’re wrong, but you run the same risk by going along with the crowd.

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