What Is a Contrarian?
Let me tell you directly: contrarian investing is a style where you purposefully go against the crowd. You sell when everyone else is buying, and you buy when most are selling. Think of Warren Buffett, the CEO of Berkshire Hathaway—he's a prime example of this approach.
As a contrarian, you believe that when people are shouting that the market is rising, they're already fully invested with no more money to put in, meaning the market is peaking. Conversely, when they're predicting a crash, they've sold out, so the market can only go up from there.
Key Takeaways
Here's what you need to grasp: contrarian investing bucks market trends to generate profits. Markets get swayed by herding, fear, and greed, leading to overpricing or underpricing. You look for stocks below their intrinsic value as buying chances. It can be rewarding but risky, often taking time to pay off, and it demands a lot of research to spot undervalued opportunities.
Understanding Contrarian Strategy
Contrarian investing means going against the current investor sentiment. You can apply it to single stocks, whole industries, or entire markets. When others are pessimistic, you enter, believing the price is below true value— that's your opportunity.
In essence, too much negativity pushes prices down unfairly, so you buy before sentiment shifts and prices rise. David Dreman, in his book, points out how investors overreact to news, overpricing hot stocks and undervaluing distressed ones, giving you room to pick winners.
Special Considerations
You often target distressed stocks as a contrarian, selling once they recover and others jump in. The idea is that herd mentality isn't smart for investing. But watch out: if bullish sentiment proves right, you might miss gains by selling early. Or an undervalued stock could stay low if bearishness persists.
Contrarian Investing vs. Value Investing
This is similar to value investing, where you seek stocks priced below their company's intrinsic value. Both believe markets overreact to news, so short-term prices don't match long-term fundamentals. Many see a thin line between them, as both hunt undervalued securities based on market sentiment.
Examples of Contrarian Investors
Warren Buffett is the standout—his quote 'Be fearful when others are greedy, and greedy when others are fearful' captures it. During the 2008 crisis, he bought stocks like Goldman Sachs when markets crashed, and a decade later, it jumped 239%.
Michael Burry shorted the overheated subprime market in 2005, profiting big, as told in The Big Short. Sir John Templeton also built massive returns with contrarian moves through his fund.
Limitations of Contrarian Investing
Be aware of the downsides if you're considering this. Finding undervalued stocks is tough; you'll spend hours researching. Just opposing the market isn't enough—you need strong fundamental analysis skills to gauge true value.
Your portfolio might underperform for stretches, and undervalued picks could take ages to gain, meaning you endure paper losses in the meantime.
Frequently Asked Questions
What is contrarian investing? It's seeking profits by trading against market sentiment—sell in bull markets, buy in bear ones.
Who are famous contrarians? Buffett, Munger, Dreman, Dalio, Templeton, Burry, and Soros.
How do billionaire contrarians use deep value? They pick stocks trading far below intrinsic value, buying large stakes expecting price rises over time.
Final Note
Remember, this isn't advice—Investopedia doesn't give tax, investment, or financial guidance. Consider your own situation, as investing carries risks including loss of principal.
Other articles for you
Negative assurance is an auditor's determination that financial facts are accurate due to the absence of contrary evidence.
Brexit refers to the United Kingdom's withdrawal from the European Union following a 2016 referendum, leading to complex negotiations and economic changes.
The Expedited Funds Availability Act regulates bank deposit hold periods to ensure timely fund availability for customers.
An open-end mortgage lets borrowers increase their loan amount later up to a set limit, secured by their home.
A conglomerate is a large corporation that owns controlling stakes in multiple independent businesses, often across different industries, to diversify risks and operations.
A bridge loan provides short-term financing to bridge the gap until permanent funding is secured, often used in real estate or business for immediate cash needs.
A lock-up agreement prevents company insiders from selling shares for a set period after an IPO to avoid excessive selling pressure.
Free on Board (FOB) defines the point in shipping where liability and ownership of goods shift from seller to buyer.
Articles of incorporation are essential legal documents filed to establish a corporation, detailing key information like name, structure, and shares.
Virtual goods are intangible assets traded in online economies, with a rapidly growing market blurring lines between virtual and physical items.