Understanding Contrarian Investing

Contrarian investing is a type of investment that involves going against the popular opinion. As a contrarian, you look for opportunities to invest in securities that have been over or underpriced mistakenly. Some of the most successful investors in the world use this strategy and it definitely has some merit. Here are a few things to consider about contrarian investing.

Contrarian Investing

This type of investment involves not following the crowd. Many times, the general market will make a decision about a particular stock. The market sentiment will lead the price of a stock up or down. In many cases, the price of the stock will be driven farther than what is justified by the numbers. When looking at the financial statements, a company might have had a bad quarter. When this happens, the general market might tend to overreact to that information. Many people will sell the stock and try to liquidate their positions in the company. When this happens, the value of the stock could plummet.

At this point, a contrarian investor may try to buy shares of the stock. The contrarian looks at this as an opportunity to take advantage of the market. When the price of a stock has plummeted, this generally represents the best time to buy. The investor can get the stock at prices that were previously thought impossible. This allows the investor to accumulate a large number of shares in the company. If the market is overreacting to the bad news, the price of the stock will shortly bounce back up again. At that point, the contrarian investor now has several shares of stock in the company and can realize a substantial profit.

Solid Companies

Many contrarian investors like to use this type of strategy with companies that they deem to be solid. This type of strategy will not always work with every company. By investing in companies that have good track records, an investor can buy stock at low prices and then hold it for the long-term. If the company is solid, the price of the stock will steadily grow.

Value Investing

This type of investment is very similar to value investing. Both types of investors are looking to take advantage of stock that is priced wrong in the market. The big difference between these two types of investment strategies is that value investing is generally based on valuation multiples that deal with information from company financial statements. With contrarian investing, the investor will most likely be aware of these formulas but will pay more attention to the market sentiment. Both investors are trying to accomplish the same goal but through different means.

Example

One of the best examples of a contrarian investor is Warren Buffett. He is perhaps the most successful stock investor of all time. Most of his purchases involve contrarian investing after the market has taken the value of a stock down to unprecedented levels.

 

blog comments powered by Disqus
Scottrade