How Effective Is the Contrarian Investing Strategy?
“Be fearful when others are greedy, and greedy when others are fearful” -Warren Buffett
The above Warren Buffett quotation is central to the contrarian investing theory. Contrarian investment is related to value investing in that both types of investors are looking for stocks that are cheap. To make money, investors in this investment technique go against the current or prevailing market trends, selling when others are buying and buying when others are selling.
Contrarian investors seek out companies whose market value is less than their intrinsic value, following in the footsteps of Benjamin Graham, author of the best-selling book “The Intelligent Investor.” People have less faith in the company’s progress and, as a result, are afraid to invest in its stock. These unappealing stocks can be purchased at a discount. With the shifting emotions among investors, they turn out to be a wonderful treasure over time (fear converting to greed). Every beaten-down business has one last puff left to make a return for investors.
In simple investing terms, the strategy is to hunt for purchasing opportunities in a bear market and selling chances in a bull market. The key to this investing method is patience. Those who acquired the discounted hydropower shares before the Bull Run of 2020 achieved big gains in the context of NEPSE. Hydropower shares that were once valued at less than Rs 100 are now valued at more than Rs 500. This is a huge increase of over 500% in a short period of time. These investors had taken a risky approach to investing. Many new investors who believe the market is now overvalued may be considering taking the same approach when the bears return. How often does this method work, they might wonder?
If the appropriate decisions are made, you may be able to reach the top of your game and meet your financial goals. Warren Buffett, for example, used the contrarian investment method to become the world’s richest person in 2008 (leading the Forbes 2008 rankings of global billionaires). Warren Buffett spotted an investing opportunity during the 2008 financial crisis, when the market was most scared due to a flood of bankruptcy filings. He invested in American companies’ stocks. When the S&P 500 soared 130 percent in 2018, his investment in Goldman Sachs Group, Inc. (GS) grew by more than 196 percent, outperforming the market by a wide margin.
The Crucial Elements of Contrarian Investing
The following is the key of contrarian investing:
- Look for possibilities when others are afraid, and sell when greed takes control. For certain investors, recessions can be the best moment to invest.
- Because you’re playing a waiting game, having a long-term investment vision is critical. It’s the difference between doing nothing and doing something once you’ve made a good deal.
- Choosing organisations with strong financial fundamentals is always a good idea. Fundamentally sound businesses frequently outperform market whims and fads.
Jim Rogers, Warren Buffett, Marc Faber, Bill Ackman, George Soros, and others are among the notable investors who have made millions using the contrarian investment method.
The strategy of contrarian investment is the polar opposite of momentum investing. So, if the bullish trend continues, and contrarian investors have already sold their positions, there is a risk of missing out, or there is a slim potential for undervalued investments to outperform the market if the gloomy feeling persists. Acting against the crowd is a contrarian financial technique. A contrarian investor believes that investments made by following the herd can turn against us at any time and without warning, making momentum investments more risky.