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Why be a Contrarian Investor ! |
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Tuesday, 24 July 2007 |
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Looking at an investment from a contrarian perspective is vitally important to stock investing success. However, it's important to realize that a 'contrarian' is not someone who follows conventional thinking, is proven wrong by the market, and then stubbornly clings to his opinion in the face of additional losses.
Nor is a contrarian an anti-trend follower. A common view is that contrarians are 'cantankerous curmudgeons' who automatically adopt the opposite viewpoint from that of the consensus. Mindless contrarianism is just as dangerous as mindless trend following.
Finally, a contrarian is not a 'value investor in drag'. Value investors specialize in buying beaten-down stocks that they perceive as cheap in the hopes that these stocks will ultimately prove to be profitable bargains. But cheap stocks can always become cheaper.
Keep in mind that contrarianism is not about buying low prices and cheap stocks. Contrarianism is about buying low expectations, not low prices. High prices do not necessarily equal high expectations just as low prices do not equate to low expectations.
The ideal contrarian purchase is a stock with strong price action, strong fundamentals, and low expectations.
Amateur investors tend to bet with consensus thinking, which is a sure way to lose in investing over time. Whether it's an article in a national publication, a hyped new product, or a 'tip' you're betting on, Wall Street has a way of already discounting such news before it becomes widely disseminated.
By that time, smart investors are looking for opportunities to bet opposite from the conventional wisdom. Understand that a contrarian does not always 'zig' when others say 'zag,' but rather looks for extreme viewpoints that are apt to spotlight the key turning points in stock prices.
That's what defines true contrarians, and that's a major reason why we've been so successful.
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