Contrarian investing is a strategy of going against prevailing market trends or sentiment. The worse off the market is, the better the opportunities are to profit. That’s seemingly the credo for contrarian investing. The idea is that markets are subject to herding behavior augmented by fear and greed, making markets periodically over- and under-priced.
Baron Rothschild, an 18th-century British nobleman and member of the Rothschild banking family, is credited with saying that “The time to buy is when there’s blood in the streets.” Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon.
Contrarian investors have historically made their best investments during times of market turmoil.
- During the crash of 1987 (also known as “Black Monday”), the Dow dropped 22% in one day in the U.S.
- In the 1973–74 bear market, the market lost 45% in about 22 months.
- The attacks on Sept. 11, 2001, also resulted in a sizable market drop.
The list goes on and on, but those are times when contrarians found their best investments.
The 1973–74 bear market gave Warren Buffett the opportunity to purchase a stake in the Washington Post Company — an investment that has subsequently increased by more than 100-times the purchase price — that’s before dividends are included. Meanwhile, the Washington Post Company had only an $80 million market cap at the time. In 2013, the company was sold to Amazon’s billionaire CEO & founder Jeff Bezos for $250 million in cash.
Contrarians, as the name implies, try to do the opposite of the crowd. They get excited when an otherwise good company has a sharp, undeserved drop in the share price. They swim against the current and assume the market is usually wrong at both its extreme lows and highs. The more prices swing, the more misguided they believe the rest of the market to be.
“Bad Times Make for Good Buys”
Do serious research
While the most famous contrarian investors put big money on the line, swam against the current of common opinion and came out on top, they also did some serious research to ensure that the crowd was indeed wrong. So, when a stock takes a nosedive, this doesn’t prompt a contrarian investor to put in an immediate buy order, but to find out what has driven the stock down, and whether the drop in price is justified.
Figuring out which distressed stocks to buy and selling them once the company recovers are the major play for contrarian investors. This can lead to securities returning gains much higher than usual. However, being too optimistic about hyped stocks can have the opposite effect.
Here are the top 5 reads that may help you choose the right stocks
- 10 Useful tools to Analyze Banking Stocks
- When is the ‘Best Time’ to BUY a Stock?
- Can the stock market be predicted?
- Decoding Technical Analysis for Traders & Investors.
- How do professional stock market analysts analyse stocks?
The Bottom Line
While each of these successful contrarian investors has their own strategy for valuing potential investments, they all have the one strategy in common — they let the market bring the deals to them, rather than chasing after them.
Analysis of financial markets is either Fundamental or Technical. Fundamental analysis focuses on financial statements in assessing the condition of a company and in predicting its future performance. Technical analysis focuses on a stock’s historical price pattern, as portrayed on charts, to predict future price movements.
Being a contrarian can be rewarding, but it is often a risky strategy that may take a long period of time to pay off. Remember, Coronavirus is a pandemic, not apocalypse so try to accumulate good stocks on every dip.
Research Analyst (SEBI Regd.)