Contrarian investing: abide by these rules and succeed or ignore them at your own risk
Contrarian investing is a dynamic field and not a static one. The assumption that it’s a static field is held by the new breed of fashion contrarians, whose only contribution to this field has been to glamorise it and distort the true notion of being a contrarian investor. These fashion contrarians are no different from those with the mass mindset; they only pretend to do things differently, but the moment fear or uncertainty is in the air, they flee for the exits like bandits being chased by the hounds of hell. A true contrarian in most cases understands the basic rules of mass psychology. If you are not familiar with these rules, you are doing yourself a disservice and should catch up on them ASAP. These simple 7 rules for contrarian investing will provide the newbie with a firm foundation on which he or she can build from.
At the Tactical Investor, while we embrace the concept of contrarian investing our true focus is on the joining the key rules of contrarian investing with the powerful concept of mass psychology. We believe this is the most robust system out there as psychology is the key driving force behind almost every human action.
We are going to provide a list of rules that we believe are the most important in terms of contrarian investing. It will provide both the novice and seasoned trader with ideas that should help improve your trading skills if implemented properly. Discipline and patience are essential traits if you want to succeed; nothing comes easily, for if it did, everyone would be able to do what you are doing.
These contrarian guidelines by no means encompass all the rules associated with the concept of contrarian investing. However, they do provide you with a firm foundation on which to build your investment career.
1) Popular media (magazines, news outlets, newspapers, TV stations, etc) should be treated in the same light as toilet paper; it has some use, but its function is to perform a distasteful action. Thus use these outlets to determine what the masses are frothing about and what you should avoid or start getting out of or into. Remember the emotions should be at boiling point. You do not oppose the masses just because they started to jump on the bandwagon; its, only when the bandwagon is overloaded and about to buckle under the load it’s carrying that you should look for an exit and vice versa.
2) Technical analysis plays a key part when it comes to investing, regardless of whether you choose to be a contrarian investor or not. It is imperative that you take the time to understand the basic tenets of this very important field. Do your best not to follow or focus only on the most popularly used Technical analysis indicators. You will be amazed at how effective some of the lesser known indicators are once you get to understand how they function and operate.
3) Spend time understanding the markets you are going to target or the sectors of the stock market you intend to play. We have put up an extensive list of resources, all of which are free here. Free Trading Resources
4) Formulate a sound plan. Don’t be an imbecile and sit there wishing and hoping to catch a home run. Those that adopt such notions, always catch a falling dagger, a process that is fraught with pain and misery. The plan should include profit targets on each and every trade, and, an exit plan, in case the trade does not work out.
5) Do not foolishly jump into Options until you grasp the key concepts of buying and selling stocks. In other words, understand when to buy and when to sell……… Make some money and then attempt your hand at options. The only exception to these rules is when you are selling covered calls and naked puts, both of which are safer than actually buying stocks if you understand the concept well. These two techniques can significantly boost your investment returns if you utilised properly. Options should also be part of an investment plan…… Do not under any circumstance use all the funds in your portfolio to play options. That is a recipe for extreme pain and suffering.
6) Learn to relax; if you don’t relax it’s really hard to win. Disease is a body not at ease, so if you are not at ease, you will most certainly perform dismally in the markets.
7) The law of balancing comes into play here. When you win a significant amount of money, help one person in your lifetime and your rewards will be 100 fold.
Additional rules for contrarian investors
A real contrarian only jumps into the investment because the asset is trading at mouth-watering levels, and blood is flowing freely in the streets……….. Buy when the crowd is paralysed with fear and fear when others are buying hand over fist.
When you are overly confident or feeling Euphoric, flee for the exits.
Never get a hot head and think you know it all. Even the best can be taken out. Keep your mental stops tight in this volatile market.
Contrarian investing is really about emotions. You are overcoming your emotions and playing on the emotions (fear or greed) of the crowd by taking a radical position.
When you take a position and people look at you with disdain or shock, you know you are doing the right thing!. When they pat you on the back or on the rear it’s time to flee for the exits. Buy low. Sell high.