The Philosophy:
It goes against human nature to stand out of the crowd! Contrarian investing is one of the oldest way of investing strategy. Warren Buffet is one of the famous Contrarian investors who sternly believes in buying when others are selling (out of fear) and selling when others are greedly buying! Contrarian investors like value investors attempt to identify investment opportunities that are not on the investment radar of majority of the investors. Contrarian investors always seeks financially solid companies that are temporarily out of favour in the market & are priced low when compared to its earnings. Contrarian investors are independent thinkers & chooses not to follow the crowd. A true Contrarian investors defines value differently & believes that the real value is at the extreme - low P/E, low P/B, low P/Cash flow and high dividend yields. Contrarian investors has to show high levels of patience as his Contrarian bets may take extended periods of time & this is because the market may not recognise the intrinsic value of the undervalued securities for years together!
Contrarian investors will at least have a investment horizon of 3 years for a bet he picks. The exact period after which the market will realize his stock pick is not predictable. Contrarian investing is very challenging & should have in-depth knowledge of how market functions. Contrarian investors understands the investor psychology & realistic market cycles. His course of actions are many a times against what normal investors think of. Contrarian investors should have a mind set like none other. If successful, they end up with multibagger opportunities.
They focus on bets which are nearing their inflection point, means they identify opportunities before others do. Many think that such investors buy stocks which are falling & keep buying as they fall. This is a misconception! In fact they are very cautious & avoids falling knives. Normally the return on investment is very high for Contrarian investors.
Normal investors sell the securities once that company is hit with a negative news. Overreaction to news is common for equity market. But Contrarian investors concentrates on other positive aspects of the company which on overall basis turns out to appreciate the stock price in long run. The negative news helps under value the stock for Contrarian investors to pick it at the right price & sell it when the stock appreciates over the time. Patience is the key as always!
Market analysts & normal investors tend to discover those stocks or securities which are already shot up in price in the market. Contrarian investors catches thet young unlike others.
Contrarian investing works under following major assumptions:
(1) The company is fundamentally strong, but external & economic factors are responsible for its underperformance.
(2) The sector or company has seen a down turn & that there is limited further downside.
(3) The company has the potential to bounce back sharply when the cycle turn around.
(4) The management of the company has done the turn around in the past and can do it again,
Risks of Contrarian investing:
Loss of capital is a major risk, as all Contrarian investing may not pass through. But as always diversification is the key to limit the losses rather than to bank on one or two Contrarian bets. If the market does not behave as the Contrarian investor anticipated a huge capital loss can occur.
Hence Contrarian investing is not for light hearted investors..
It goes against human nature to stand out of the crowd! Contrarian investing is one of the oldest way of investing strategy. Warren Buffet is one of the famous Contrarian investors who sternly believes in buying when others are selling (out of fear) and selling when others are greedly buying! Contrarian investors like value investors attempt to identify investment opportunities that are not on the investment radar of majority of the investors. Contrarian investors always seeks financially solid companies that are temporarily out of favour in the market & are priced low when compared to its earnings. Contrarian investors are independent thinkers & chooses not to follow the crowd. A true Contrarian investors defines value differently & believes that the real value is at the extreme - low P/E, low P/B, low P/Cash flow and high dividend yields. Contrarian investors has to show high levels of patience as his Contrarian bets may take extended periods of time & this is because the market may not recognise the intrinsic value of the undervalued securities for years together!
Contrarian investors will at least have a investment horizon of 3 years for a bet he picks. The exact period after which the market will realize his stock pick is not predictable. Contrarian investing is very challenging & should have in-depth knowledge of how market functions. Contrarian investors understands the investor psychology & realistic market cycles. His course of actions are many a times against what normal investors think of. Contrarian investors should have a mind set like none other. If successful, they end up with multibagger opportunities.
They focus on bets which are nearing their inflection point, means they identify opportunities before others do. Many think that such investors buy stocks which are falling & keep buying as they fall. This is a misconception! In fact they are very cautious & avoids falling knives. Normally the return on investment is very high for Contrarian investors.
Normal investors sell the securities once that company is hit with a negative news. Overreaction to news is common for equity market. But Contrarian investors concentrates on other positive aspects of the company which on overall basis turns out to appreciate the stock price in long run. The negative news helps under value the stock for Contrarian investors to pick it at the right price & sell it when the stock appreciates over the time. Patience is the key as always!
Market analysts & normal investors tend to discover those stocks or securities which are already shot up in price in the market. Contrarian investors catches thet young unlike others.
Contrarian investing works under following major assumptions:
(1) The company is fundamentally strong, but external & economic factors are responsible for its underperformance.
(2) The sector or company has seen a down turn & that there is limited further downside.
(3) The company has the potential to bounce back sharply when the cycle turn around.
(4) The management of the company has done the turn around in the past and can do it again,
Risks of Contrarian investing:
Loss of capital is a major risk, as all Contrarian investing may not pass through. But as always diversification is the key to limit the losses rather than to bank on one or two Contrarian bets. If the market does not behave as the Contrarian investor anticipated a huge capital loss can occur.
Hence Contrarian investing is not for light hearted investors..
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