Contrarian investing is essentially just like it sounds: a strategy built on doing what other people aren’t. The credo that the contrarian investor lives by is simple:
Be fearful when others are greedy, and greedy when others are fearful.
Warren Buffet
This quote is from the King of Investors Warren Buffet. And although he is the foremost contrarian advocate of our times, he didn’t invent the idea. Buffet initially learned the contrarian principles through Benjamin Graham‘s “The Intelligent Investor”.
Reading the Intelligent Investor is arduous at times, and frankly boring, and much of what it says is not directly applicable to the current state of the world. For example, bond yields are remarkably lower than they were when the book was originally written, at least in the United States and much of the so-called “Western World”.
Yet, it’s wisdom is timeless. In this way, it’s much like listening to your parents. You don’t want to listen, you don’t listen, and then you crash and burn.
The Contrarian Message
The message is simple:
Buy when everyone else is selling. Sell when everyone else is buying.
Yet, at the same time:
Don’t be swayed too much by the market.
A falling market will create bargains. That’s what you want: bargains. Yet, not all falling stocks are bargains. The contrarian investor looks for the diamond in the ruff.
Do you see it? That one dirty diamond covered with grime and slandered by everyone. People don’t want to go near it. Yet, you have the courage to go over and take a look. Have a look. Is it a falling knife or is it a diamond in the rough?
In order to know the answer, you have to know at least something about the company itself. What do they do? Is this a business with a strong future? What is its Free Cash Flow, Net Earnings, are these growing?
Fortunately, you don’t have to go to business school. Fundamental indicators like P/E, P/B, and P/FCF can help point the way to value.
On the other hand, contrarians contend that periods of speed-fueled market mania mean one thing: SELL.
Is Contrarian Investing a Smart Idea?
If you decide to go the route of the contrarian, prepare to have a permanent case of FOMO. Contrarianism means missing out on many huge waves like the current tech wave and other massive price gains. This is something which a lot of people may not be able to resist.
If you are able to time the market, more power to you. I genuinely mean that. Unfortunately, this is mostly easier said than done. Contrarian investing offers people a strategy built on rationality and principles. Will this strategy work going forward? I do not know for certain. I would say the likelihood is quite high however.
Hopefully this gave you something to think about,
Happy Investing.
