Being a contrarian investor means investing against the prevailing market sentiment and conventional wisdom. Contrarian investors often look for opportunities to buy when everyone else is selling, and to sell when everyone else is buying. Some may connote contrarian investing as acting differently from the crowd. In general, many successful investors are contrarians such as Warren Buffett, Sir John Templeton and Joel Greenblatt. Examples of contrarian investing:
- Having a different view of the general market
- Having a different view of a stock, a sector or a country that is out of favour, undervalued or underestimating (or overestimating) their long-term potential
- Overreaction to news and events
Being a contrarian ≠ Doing the opposite of what the market is doing
The term “contrarian” comes from the word “contrary” which means opposite. However, being contrarian does not mean doing the opposite of what the market is doing for the sake of it.
The market is generally right. These investors do not begin with the thesis wanting to be different and being contrary to the market directions. Rather, it is about doing due diligence, developing strong independent views and having trades that turn out to be contrary and different to the prevailing market’s directions.
Not about trend following or being contrarian.
Some may conclude that investing/trading strategies are all about either following the market or being contrarian. They represent directions and not strategies. Different contrarian investors have different perspectives and strategies though they are directionally similar. They have different perspectives of “value” and “attractive” in terms of intrinsic value, the margin of safety and long-term potential that are different from the market.
Contrarian investors do not call them contrarians. They are value investors and being consistent in an inconsistent market.
Contrarian investors are often a label given by others because of their perspectives and investing styles; they do not call themselves contrarians.
Instead, they call themselves value investors or simply investors who develop their unique investing styles to make money. They believe that they are rational and consistent in their investing approach within their circle of competence in a market that can be inconsistent with temperamental mood swings. They feel that it is the inconsistent and sentiment-driven market that gives rise to profitable opportunities to exploit. Because their views and approaches are generally different and yet profitable, they are called contrarian investors by others. To learn more about investing, it is best to go beyond the given labels and learn their investing styles in greater detail.
Value investing by its very nature is contrarian.
Seth Klarman
Many will view these contrarian trades risky as they are contrary to the general market trends and beliefs. However, these investors do lots of study and research that they are confident they are right and that their investments are low risks and have huge margins of safety. Most others may not share the same views or simply, do not do due diligence and yet conclude that the investments are risky.
These contrarian investors are not worried about what the market thinks; they believe that they are right and profitable. They do not seek confirmation and agreement from others.
A business or stock is not an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What’s required is thinking rather than polling
Warren Buffett
Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well
You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right
I will tell you how to become rich…Be fearful when others are greedy. Be greedy when others are fearful
Show me a guy who’s afraid to look bad, and I’ll show you a guy you can beat every time.
Lou Brock
Good to be open-minded to contrarian views
At times, we can become greedy or fearful of the market that we become less rational. It is good to be open-minded and aware of prevailing contrarian views to avoid confirmation bias and tunnel vision. It helps us to have our rationality in check.
All of humanity’s problems stem from man’s inability to sit quietly in a room alone.
Blaise Pascal, Pensées
Most people do not go to the sources (the filings and resources of the company and competitors etc.) to do their due diligence and form our understanding. Rather, they are heavily influenced by media and the headlines to tend to follow others to buy and sell.
Related article: Here’s why the best investing opportunities are not obvious
