What Is Contrarian Investing And What Should Be Your Strategy?
There is a term that goes around in the stock market, and that is contrarian investing. You might ask what actually contrarian investing is. If you have ever been a regular watcher of Seinfeld, you might have caught an episode of the show, where George Constanza has his instincts telling him what to do, but he decided to just the opposite.
By the time the episode nears its completion, George comes across a gorgeous woman in his life and grabs an awesome opportunity to work with the New York Yankees. You will find some investors who would aim for Constanza-Esque outcomes by doing just the opposite of what most other market investors would do. They are selling stocks when the others are buying and purchasing shares at a cheap rate when others are selling. Get to know in detail.
What Is Contrarian Investing?
Contrarian investors analyze the market scenario and the overall sentiment of the investors. When the majority’s sentiment is in one particular direction of the trade, they turn towards the opposite side. The opportunities of contrarian investing usually arise when investors tend to rush into a specific asset class or sector. For instance, tech stocks have been much in demand for some years now. At the same time, energy stocks have not been in favor owing to unfavorable returns.
Now, what the contrarian did? They sold all the tech stocks and purchased enough energy stocks. The strategy of contrarian investing happens to be a long-term one. Over the last ten years, the ongoing underperformance of energy stocks can lead to positive market sentiment changes. When it gradually proceeds towards a change, the contrarian investor is all set to reap the dividends.
A Contrarian Investment Strategy
A contrarian investor tends to think on the lines of a value investor. Both aim to purchase shares of stocks while they are much lower than their intrinsic values. However, contrarian investors are more comfortable with stocks that are lower than the intrinsic values due to just one basic factor: the market sentiments that find these stocks unfavorable.
Most investors are excited about their investments. And contrarian investors realize that the growth of these investments will, in all likelihood, slow down. Anticipating that, they begin to sell their holdings and make investments in industries that are not so popular in the market.
Examples of Contrarian Stocks
There are three types of contrarian stocks. First comes commercial real estate investment trusts. REITs in commercial real estate have grown unpopular since the time the COVID-19 pandemic started. As people had to stay indoors and had to work from their homes, the share prices of various companies that deal in New York City real estate hit an all-time low. They are in a recovery mode these days, but the pace is quite slow.
Banks did have a very rough time in 2020, and the situation compelled them to pay instead of receiving income from interests. For contrarian investors, the stocks of wells Fargo and Citigroup are excellent choices. The third example of contrarian stocks in international stocks. The stocks of the companies based in the United States have surpassed the performances of the stocks of international companies over the last ten years.
Famous Contrarian Investors
The billionaire Warren Buffett has tendencies that resemble a contrarian investor. He has always advised people to be fearful while others are greedy and greedy while others are fearful. Bill Ackman, the founder of Pershing Square Capital, is popular for his tendency to make investments in stocks that are not in favor and short-sell stocks of companies in vogue.
His approach to investments is almost like an activist. He makes good use of the stock holdings of his firm and influences the other firms to make some changes. Michael Burry is also known as a contrarian investor. The book and the film that goes by the name, The Big Short revolves around him. Through his hedge fund named Scion Asset Management, Burry has made and continues to make certain contrarian investments.
Advantages and Disadvantages
When a contrarian investor buys unfavorable stocks, the risks are much less compared to the stocks that are quite popular. Moreover, their portfolio will go on to beat the market in the long run. Among the disadvantages, a contrarian investor has to be psychologically strong enough to stay committed to an investment amidst all the negative sentiments around it.
To be a contrarian investor, you need to think on creative lines and have market expertise. You also need to prioritize your objectives for the long run and make an informed decision.
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