All about Contrarian Investing !
This article delight gives you all insights and in-depth look at the Contrarian Investing .
What is contrarian investing?
Contrarian investing is an investment style in which investors purposefully go against current market trends by selling when others are buying, and buying when most investors are selling. For example, if the market is bullish, the contrarian investor is bearish and will look for opportunities to sell. Conversely, if the market is bearish, the contrarian is bullish and will look for opportunities to buy. The most prominent example of an investor who believes in contrarian investing is Warren Buffett. “Be fearful when others are greedy, and greedy when others are fearful” is one of his most famous quotes and sums up his approach to contrarian investing.
Who are Contrarian Investors ?
A contrarian investor is unconventional investor in his strategies. He tries to make profit in the stock market by going against the prevalent popular trends. This does not mean that he will avoid a good stock which is profitable if it is being bought in droves. He or she will avoid it only if the stock is priced too high. A Contrarian investor assess prevailing market conditions and overall investor sentiment, and when sentiment leans heavily in one direction, takes the opposite side of the trade.
According to the contrarian mindset, high amounts of pessimism have pushed the stock price below the amount it should be. The contrarian investor will go ahead and buy the stock before the broader market sentiment returns, and the price of the share rebounds. The contrarian logic is seen when investors overprice the ‘hot’ stocks and undervalue those which are distressed. The overreaction causes a limited upward price movement. Alternatively, there are steep falls for the stocks that are considered ‘hot.’ This makes space for the contrarian investor to pick underpriced stocks.
How Contrarian Trading Works
Firstly, contrarian investors enter the market when the sentiment may be overwhelmingly negative. They pick distressed stocks and aim to resell them once the share price is recovered. Around this time, other investors have begun targeting the company as well. The fundamental idea with which a contrarian investor operates is that herd instincts can take control of the direction of the market’s flow but doesn’t necessarily make for a great investing strategy.
Value investing vs contrarian trading strategy
While contrarian investing and value investing have differences, at times contrarian investors are cut from the same cloth as value investing. Contrarian investing is similar to value investing in a way that both value and contrarian investors look for stocks whose share price is lower than the intrinsic value of the company. Value investors generally believe that the market overreacts to good and bad news, so they believe that stock price movements in the short term don’t correspond to a company’s long-term fundamentals. Many value investors hold that there is a fine line between value investing and contrarian investing, since both strategies look for undervalued securities to turn a profit based on their reading of the current market sentiment.
The Phycology behind contrarian investing
When you hear a particular company’s share is doing really well you then want to buy it. Similarly, any negative news may discourage investors to sell the stocks in a panic. A contrarian investor believes that many investors unnecessarily panic and overreact to the news. This often leads to a stock jumping more than required or under-valuation of share prices. In such an event, the share price does not reflect its true inherent value. In the long run, stocks almost always fall or rise to their true value. He realizes the mismatch between the prevalent share price and the true value of the share. This encourages him to buy the shares of a company which is otherwise out of favor. The contrarian investor, thus, looks at the long term prospects.
Final Takeaways
Investors like Warren Buffett, Peter Lynch and John Templeton have many times mentioned how profitable the contrarian approach to investing can be. However, It can be challenging to find undervalued stocks and contrarians typically spend a great deal of time researching stocks and various industries to find potential investment opportunities. It will not be enough to rely on simply doing the opposite of the prevailing market sentiment. It’s important for contrarians to develop their skills in fundamental analysis to accurately measure a security’s intrinsic value.
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For more insights on the topic :
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