Contrarian Investing: Going against the Current

Contrarian investing is a style investing that is designed to go against what the popular opinion in the market is. This type of investor attempts to take advantage of mistakes that are made by the masses. Here are the basics of contrarian investing and how it works. 

Going Against the Masses

If you are a contrarian investor, you do not necessarily believe that the masses are always wrong. However, you do believe that you can take advantage of going against the masses in certain situations. With this logic, you do not believe that just because everyone else is doing something, it is a good idea. Contrarian investors formulate their own opinions based on research instead of following the crowd.

Many professional investors do things differently than your average retail investor. For example, many inexperienced investors will liquidate their shares of a stock after it declines in value rapidly. They fear that the stock is going to bottom out and they try to salvage as much of their investment as they can. Many other investors would argue that this is the best time to buy. When you find a company that has declined in value, this provides you with an opportunity that you can purchase shares at lower than the regular price. Then when the stock rebounds, you can make a substantial return on your investment.

Value Investing

Contrarian investing is a style of investment that is very similar to value investing. Both of these strategies are attempting to locate stocks that are undervalued by the market. Value investors are typically going to place a lot more emphasis on quantitative analysis. Contrarian investors tend to look at market sentiment and the overall opinion of investors in the market. Either way, both of these investors are trying to take advantage of a stock price that is below the actual value of the stock.

Fear

Fear plays a vital role in the stock market. Contrarian investors regularly attempts to take advantage of fear in the market place. Many times, a news release or some other piece of information can cause the price of a particular stock to plummet. Investors will sell quickly just because they hear that everyone is getting out. Fear can sometimes drive the price of the stock far below what it is actually valued at. When this happens, contrarian investors will come in and buy the stock.

Optimism

Optimism can work in the same way that fear does in reverse. Many people get too high on the prospects of a company and end up paying too much for the stock. When this happens, contrarian investors will short sell the stock in anticipation of a rapid decline in the future. 

Examples

Warren Buffett is most likely the most famous contrarian investor. He regularly purchases stocks that have fallen in value because of market sentiment and volatility. John Neff is another well-known contrarian investor that formerly was in charge of managing the Vanguard Windsor fund. 

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