Contrarian investors use a variety of strategies, but they all have one thing in common: they let the market bring deals to them! Watch the fascinating Ted Talk below on how to get an edge.
Discover Why Profit Opportunities Improve For Contrarian Investors When Markets Worsen
What Is A Contrarian?
A contrarian invests against market trends. They sell when others are buying. And they buy when others are selling.
Contrarian principles can be applied to individual stocks, an industry or a whole market.
A contrarian believes the value of an asset or market is below its intrinsic value and as such, it represents an opportunity.
Essentially, when a majority of investors are pessimistic about a stock to the extent its price has been pushed lower than it should be, a contrarian investor will buy before the broader sentiment returns and the price recovers.
Contrarians often target distressed stocks and then dispose of them when the price has increased and other investors start buying.
Contrarian investing is based on the fact that often, investors think and behave in a similar fashion to those around them.
Just because others are buying doesn’t necessarily mean that following the herd is the right thing to do.
It's Sin 3 - Greed - one of the seven deadly sins of investing.
The Poorer The Event, The Better The Prospects For Contrarians
Contrarians have often made their best investments during the most dramatic events. These include the 1987 ‘Black Monday’ crash, the 9/11 Twin Towers disaster, the 2008 financial crisis, and more.
With the market enjoying the longest bull run in history, it's no surprise to learn that contrarian investors are rubbing their hands with glee.
Way back, Baron Rothschild, an 18th century British nobleman and member of the secretive Rothschild banking family, is credited with telling investors the trick to making money is this:
Buy when there's blood in the streets.
He made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon.
One of Warren Buffett’s famous quotes is this:
The future is never clear; you pay a very high price in the stock market for a cheery consensus.
In other words, if everyone agrees with your investment decision, then it's probably not a good one. He has a history of investing in companies that have fallen out of favour or whose price is trading below its asset value, profiting handsomely when the market cottons on.
Contrarian Investing Isn’t Always Spot On
While some of the world’s most successful investors have contrarian tendencies, it’s not a guarantee of success.
Selling positions when other investors have returned can lead to missing out on gains if the growth continues. And an undervalued stock that's perceived as a potential investment winner may remain undervalued if the market sentiment remains negative about it.
Contrarian Investing And Inventing The Future
In an enlightening Tedx Talk, Josh Wolfe shares the framework through which venture capitalists look to invent the future.
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