What is contrarian investing not for weak heart people

Contrarian investing is as old phenomenon as  investing itself. It is one of the most revered investing philosophies and somewhat over laps with the value investing philosophy.

Contrarian investors, like value investors, attempt to identify investing opportunities that are not on the investment radar of majority of investors. The contrarian investors are always looking for financially solid companies that are temporarily out of favour in the market and are priced low when compared to their earnings. Contrarian investor is an independent thinker and chooses not to follow the crowd. A true contrarian defines value differently and believes that the real “value” is at the extreme – low P/E, low P/B, low P/CFand high dividend yields. A contrarian investor has to show patience as his contrarian bet may take ages to fructify. It is observed that value stocks remain undervalued for extended periods oftime and this is because the market maynot recognize the intrinsic value of the undervalued securities for years together. When a contrarian investor takes a bet on a value stock that is out of favour in the market it is almost impossible to predict when the stock or the sector will start recovering and catch investors’ attention. It is safe to say that any contrarian investors need to have an  investment horizon of more than three years at least.

What are the key benefits of contrarian investing ?

The key benefits of contrarian investingare buying stocks whose risk is low, sinceit is already perceived by the crowd as underperformer. The crash of 2008 is a classic example. when majority were selling shares from their portfolios and fleeing to the perceived safety of cash, while for contrarian investors, it created incredible buying opportunities. Now, with the internet age where market news moves in sub-seconds, any big newsflash that traders think will help in moving the stock has already been factored. The market has repriced before it gets past the specialist wires.

What are the risks in contrarian investing?

The risk of contrarian investing is loss of capital. However, as we said, to safeguard that, investors need to apply stock screening model and not just buy any random down-on-luck stocks or penny stocks. We have seen many stocks that failed to provide any returns even after market reaching all-time high. Some of the stocks that can be identified for contrarian investing are identifying companies with solid brands and good cash flows that are suffering a temporary economic setback and would benefitfrom a recapitalization and management change.

Why contrarian investor earn better returns?

The stock market has a way of consistently overvaluing prospects of highly regarded companies and just as consistently undervaluing those that appear to have lacklustreoutlook.History indicates that in a great majority of cases, there has been a resurgence of earning power, followed by renewed enthusiasm and higher market prices for such out-of-favour stocks.

CONCLUSION :-

Contrarian investing is not for a part-timer, nor is it for an investor who understands equity markets superficially. Any investor who can diagnose the market trends, can think independently and is willing to wait for years together to see his or her investment grow can dabble with contrarian investing style.

To go against the crowd can be rewarding once the outcome is positive. If the markets do not behave the way contrarian investor anticipated, the amount of loss can be huge. Hence, contrarian investing is not for the light-hearted investor. For retail investors, seeking an expert’s advice is highly recommended before adopting the contrarian investing style. One of the smarter moves could be choosing to invest in mutual fund that adopts contrarian investing philosophy. If one takes a portfolio approach, not more than 10 to 15 per cent of one’s portfolio should be dedicated to the contrarian investing philosophy at the best.