Contrarian Investing: Is it a Smart or a Coward Investment Move?
Before we dive into the depth of the topic, let’s do a little exercise to understand the meaning of the term contrarian investing. It means investing against the crowd. In simpler words, when the whole community is busy buying, a contrarian will sell, and vice versa. The contrarians swim against the current.
In more poetic words, it is an investment strategy that rewards patience and confidence in order to generate high returns. Even the world-class investors applied this strategy to earn big-sized returns on their investments.
Then, What’s the Problem?
The problem is nowhere else; it lies in your fear of losing. Not all the investors have the guts to be a contrarian. One needs a heart of the soldier to win the battle against the whole community. Similarly, in contrarian investing, you need to sacrifice a lot of your love for money. There is a famous saying which goes like ‘buy when blood is in the street.’ It means to invest when the market is unfavorable. This is how you need to sacrifice your love for money by deploying it in an unfavorable market situation. But still, it is not so easy for the majority of the investors to do that. The love for money is extremely high in them, and they will never tend to do such a blunder.
Let’s move on to the next point which will reveal the truth that will leave you in a shock!
In the last line, we said it’s a blunder investing in such a situation when the market is absolutely not in your favor. You might also believe it to be true. Of course, who will try such stunts with their hard-earned money when there are high chances of losing them. But, do you know that many legend investors followed this style and became billionaires. Baron Rothschild, a member of Rothschild Banking Family (18th century), is credited with the saying that, "the time to buy is when there's blood in the streets."
Caution: It is not implied anywhere that a contradictory move will lead to cent percent success. However, the legend investors have used this technique after analysing the various other aspects and taking the fundamental measures in concern. So, don’t ever think that contrarian investing will always be beneficial. For instance, one of the most important things is that you need to make a good selection of stocks, and have faith on your move. The only key to success is to have confidence in the work, and patience for the reward.
You can confidently do any task if you know about it well. With appropriate research and studies, you can become confident in your investing too. And when you invest confidently, you won half of the battle.
Value investing was popularized by Ben Graham in 1930s, and it is one of the most widely used and well-established stock market investing strategies. It means, investing during the downmarket scenario in the companies which have potential to gain value in the future. Most of the successful stock investors were the value investors. They saw value in the stocks where the crowd did not, and avoided the companies that everyone else were charmed with. Moreover, value investing has been proved to be one of the panaceas to success in the stock investing. Very famous words from one of the legend hedgers, Seth Klarman, “Value investing is at its core the marriage of a contrarian streak and a calculator.” Although it’s not an easy task, the rewards gained can be unbelievable and extraordinary.
Famous quotes by some of the value investors who gained billions by investing in this style:
“I will tell you how to become rich. Close the doors. Be greedy when others are fearful, and fearful when others are greedy.” -Warren Buffett, Multi-Billionaire CEO of Berkshire Hathaway
“Buy value, not market trends or the economic outlook.” -Sir John Templeton, Billionaire Investor and Philanthropist
Now, you might have understood that how contrarian investing works better with the help of value investing. To be a contrarian, you need to be a good analyst so that you could make out that which stocks to choose and which one to avoid. You should be able to find out the value in the stocks which are undervalued by the mass investors. And avoid looking at the ones which the rest are enamored with.
The Bottom Line
Contrarian investing can be a smart move if done with the perfect blend of value investing. However, there is no such rule to measure how one can make out the perfect of value investing, but one needs to be confident and patient for the right time to be rewarded. Last but not least, one should not bury oneself in the race of contrarians without having the required understanding.
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