Stock Market

What is Contrarian Investing?

Created on 25 Jun 2022

Wraps up in 5 Min

Read by 1.4k people

Updated on 10 Sep 2022

For once, "Mera wala alag hai!" might be a good thing for you. We're talking about your portfolio, of course!

A popular dialogue from a Rajnikant movie, “Jhund me toh kutte aate hain, sher akela chalta hai”. Yes, that might be the ideology most contrarian investors believe in. 

Contrarian investing, as its name suggests, follows an investment strategy that runs contrary to the popularly used ones. It means buying assets at a time when others are panic selling it. 

The contrarian strategy sounds interesting, isn’t it? Yes, it would because even Warren Buffet advocated the contrarian strategy is beneficial. His mantra for investing was “be greedy when the others are fearful, and be fearful when the others are greedy”. 

But what does a contrarian investing strategy means in a technical sense? Yes, we need to talk about this. This is because understanding the contrarian investing strategy has become more relevant than ever. The more the markets are being volatile due to the possibility of a recession, the more it can help if we get control over a strategy and do not panic. 

Let’s discuss the meaning, examples and benefits of contrarian investing in this blog. 

Understanding Contrarian Investing

There are more drawbacks than benefits to going with the flow of investing. Let us see what happens when you follow the popular market sentiment. 

In 2009, global markets were hit by a dreadful financial crisis. Now, remember that the stock prices fall when people sell their stocks. So, during the 2009 financial crisis, investors around the world indulged in panic selling.

Thus, all the markets globally crashed. What led to this phenomenon was following the popular sentiment of selling stocks when others sell. 

Similarly, when you see the markets booming, there is an aspect of herd mentality followed by investors. The massive chunk of investors blindly follows the pattern of other investors, making them the worst losers.

That is why it can be beneficial to pursue an investment strategy that is contrary to the popular market sentiment. This is because you end up “buying the low and selling the high”.

This has made the ace investor Warren Buffet to be the biggest proponent of the contrarian investing strategy. 

The Rationale Behind Contrarian Investing

A contrarian investor often believes that the majority of the investors are unnecessarily panicking or overreacting to the news. The contrarian investors are patient and look for opportunities in the event of challenging market situations. Here’s how. 

When you learn about a stock performing really well, you might want to add it to your portfolio. Still, when you see that it is going down, you want to book even the slightest profit and move out of it. This can lead to stock prices jumping to an unreasonably high level or falling to an undervalued level. 

During either of the above-mentioned events, the stock prices move further away from their inherent value. In contrarian investing, you always know that according to the historical study of benchmark indices, the stock prices move above their intrinsic value in the long run.

Contrarian investors understand the mismatch between the stock’s inherent value and the current value. Thus, in contrarian investing, you should look at the long-term while investing and try to adopt the opposite strategy. 

The following are the two crucial behavioural traits of a contrarian investor: 

1. Risk accepting

This is one of the most important qualities when it comes to contrarian investing. A contrarian investing strategy involves risk. This is in line with anything that can give you profits. In contrarian investing, you need to ride against the tide. However, this should not be done without proper research. 

Suppose the price of a stock is drastically falling because of a hostile or unethical practice done by the company. In this case, the price of that stock may or may not bounce back to its current price any sooner. Therefore, it is crucial to know the nitty-gritty behind the price movements in the stock market. 

Further, it is easier said than done to go against the current market sentiment. This can become especially difficult to ascertain during booms. A high price of a stock might not be high enough to sell the stock. And then, it might not be reasonable to buy again.

Therefore, there is always a higher degree of risk involved that a contrarian investor is willing to take. 

2. Unconventional Investing

Contrarian investors are unconventional in their approach to investing. This practice of going against the popular market trends helps them earn more profits than others in investing. But that doesn’t mean that contrarian investing is always about following the opposite of a sentiment. 

Sometimes, the stock price of a valued stock might be increasing. In this case, it can be better to buy the stock if you believe that it is closer to its intrinsic value. Otherwise, the stock might move away from your reach. 

In contrarian investing, it is all about buying cheap and selling it expensive. 

3. Patient and time-respecting

Earning profits in contrarian investing is always about timing. Any action taken at the right time can benefit your portfolio and help you walk that mile in making your portfolio grow. 

For example, suppose you have bought a stock at a specific price, and now it has declined in terms of value. So, by buying at a lower level, you can average out your buy price for the stock and earn higher returns when the stock price moves up again.

Still, we are not asking you to jump onto a sinking ship so perform proper due diligence before investing in any stock to make this process easy for you we give you Ticker by Finology which is a modern stock screener that helps you pick the better stocks. Where contrarian investors are quick to grab opportunities, they are also very patient individuals.

For example, a contrarian investor finds a fundamentally strong stock to add to one’s portfolio. If the stock price seems more than the inherent value, they would patiently wait for the stock to move back to their preferred price. This means that a short-term rise in price won’t make the investor lose patience and buy at any available price. 

Conclusion

Contrarian investing is an unconventional investing strategy for those willing to take a higher risk investing. 

At present, the global stock markets are under the pressure of a possible recession. This condition of the stock market is due to the rising inflation and the contagion of the ongoing war between Ukraine and Russia.

As the markets are sliding further day by day, it might be beneficial to have a patient and research-oriented contrarian investing strategy in place. 

Every contrarian investor must remember to “buy at lows and sell at highs”. And, in anyway a long term investment strategy can take you easily towards a contrarian strategy.

An Article By -

Devashree Patel

13 Posts

37.2k Views

11 Post Likes

2

Devashree has always been passionate about finance and economics. She has an experience of 2 years of working in the finance domain. Her writing is always detailed and on to point which makes it easy to read and understand. She has a BA in Economics degree and currently pursuing MBA from NMIMS.

Topics under this Article

Share your thoughts

We showed you ours, now you show us yours (opinions 😉)

Why not start a conversation?

Looks like nobody has said something yet. Would you take this as an opportunity to start a discussion or a chat fight may be.

Under Stock Market

"A few" articles ain't enough! Explore more under this category.

Share

Facebook

Twitter

Whatsapp

Linkedin

Or copy the link to this post -

Copied