Investing can be tricky. Investors sometimes overreact to the slightest whiff of bad news about a company. Other times, they rush to jump on the latest investing trend, pumping up a company’s share price. Contrarian investing looks to do the opposite.
Certain metrics, such as profit margin and P/E ratio, can give us clues as to which companies are outperforming the competition. Still, there are a lot of unknowns. No one could have predicted the COVID-19 pandemic and the impact it would have on the markets.
But even the human element of investing decisions can be irrational at times.
When contrarian investors see other investors jumping to conclusions, they do the opposite. Oftentimes, that involves buying stock in companies trading below their intrinsic value after a market trend or news story caused a drop in price.
Thus, contrarian investing bears some similarities to value investing. But the two aren’t exactly the same. While contrarian investing has its limitations, it can be a lucrative strategy. And many investors have made millions with it.
What is the Contrarian Investing Strategy?
Contrarian investors intentionally go against market trends. They do this by buying stocks when they are down and selling stocks when they become overheated. Contrarian investing can be applied to sectors and markets as well. The idea is that herd behavior can cause large numbers of investors to make similar decisions. For example, investing in “hot” stocks. They may do this even if some of those stocks are overvalued.
Contrarian investing is not a short-term strategy, like you might see with day trading. Instead, contrarian investors buy and hold stock in companies or industries that align with their strategy. They are investing in stocks most investors wouldn’t consider. And because of this, it could be months or even years before the stocks they are buying reach their perceived value.
Contrarian Investing vs. Value Investing
As mentioned, contrarian investing and value investing bear some similarities. In fact, some believe there is no difference between the two. Although, there are some things contrarian investors do that value investors probably wouldn’t.
Where the two are similar is the tendency to invest in undervalued assets. Both investors will look for assets that are trading lower than their intrinsic value.
However, value investors lean primarily on metrics such as book value and P/E ratio, looking for assets that are trading at a discount simply by the numbers. Contrarian investors, on the other hand, pay more attention to investor sentiment. They may choose to buy …….