You can’t say you’ve never heard of a contrarian viewpoint if you’ve never heard or read Warren Buffett’s famous quote, “Be fearful when others are greedy and greedy when others are fearful.”
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Contrarian investing is just that — it means investing against the crowd. But it’s a hard way to go. As humans, we tend to want to move with the crowd. So, if you’re like Buffett and picking up a bunch of ho-hum companies in the 1990s instead of buying up companies related to the tech bubble, it might seem, gosh, too boring for words. But as Buffett proved, being a contrarian can have a huge payoff.
If you see yourself as the type who goes your own way (you’ve always worn pants in the summer and shorts in the winter), you might have the makeup to be a great contrarian investor.
Let’s get into the definition a little more and a few contrarian investing tips so you know whether it might be the way to go as you ring in the new year.
What is Contrarian Investing?
Contrarian investors use lots of market research to their advantage and the biggest goal is to move your capital from overvalued positions to those that are undervalued. When you buy stocks at discount, you make money once the larger crowd catches on and everyone else says, “We should have invested in that company ten years ago!”
(Contrarian investors would have already recognized the company as excellent and have been way ahead of the game.) However, you’ve still got to do your research, because if you invest in bad companies to begin with, of course you won’t make money.
Here’s an example of how it works: Let’s say that the majority of investors, seeing the Omnicron variant taking over, sell all of their hospitality-related stocks. A contrarian investor buys these stocks instead, believing that consumer demand will ratchet back up as soon as advanced COVID vaccines and boosters hit the market. A contrarian investor might also choose to short overvalued stocks.
Contrarian investors go against the grain in just about every way possible. So how do you do it? Let’s walk through a few tips to use contrarian investing as a strategy.
Tip 1: Start with great analysis.
Skip watching the news. If something great has happened with a particular company and you hear it on the news, you’re already too late. The news media is always a day late and a dollar (or in many cases, thousands of dollars) short. You must apply your own analysis to learn about companies, independent of what’s happening in …….