Contrarian Investors: Key rules for contrarian investing
Contrarian Investors: Key rules for contrarian investing

Contrarian Investors: Key rules for contrarian investing


Contrarian Investors: Key rules for contrarian investing

Contrarian Investing  Is a Relatively Simple Concept 

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 seven rules for contrarian investing will provide the newbie with a firm foundation on which he or she can build from.

Real Contrarian Investors Understand  The BasicPsychologyhology

At the Tactical Investor, while we embrace the concept of contrarian investing our true focus is on 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 regarding 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.

Contrarian investing key rules to follow

Key Rules for Contrarian Investors

1) Popular media (magazines, news outlets, newspapers, TV stations, etc. really ) 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.

Two other factors that are helpful

  1. Learn to Relax: Stress equates to a body not being at ease. If you are not at ease, you will most certainly perform dismally in the markets.
  2.  The law of balancing comes into play here. When you win a significant amount of money, help one person in your lifetime; your rewards will be 100 fold.

Additional Tips for Contrarian Investors

  • A real contrarian only jumps into the investment because the asset is trading at mouth-watering levels.  Moreover, 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 overcoming your emotions.  Use Fear and Panic to your advantage by taking a position that is contrary to that of the crowd
  • 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.

Quotes from Notable Contrarian Investors

Sir John Templeton

“To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward.”

“Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

“If you want to have a better performance than the crowd, you must do things differently from the crowd.”

“Invest at the point of maximum pessimism.

The four most dangerous words in investing are ‘This time it’s different.’”

“If we become increasingly humble about how little we know, we may be more eager to search.”

Sam Zell

“I am very focused on understanding the downside”

“If everyone is going left, look right”

“There is tremendous value in being a good listener”

“I run my company as a meritocracy with a moral compass”

“In any negotiation, I believe in leaving a little bit on the table. And in any relationship, I believe in sharing the stakes.”

“Reputation is your most important asset. Everything you do, everything you say, is part of the permanent record. Your name reflects your character”

“You don’t go wheeling and dealing for the money, you do it for the fun. Moneys just a way of keeping score”

“I simply don’t buy into many of the made-up rules of social convention”

“The bottom line is if you’re really good at what you do, you have the freedom to be who you really are”

“All the opportunity in the world means nothing if you don’t actually pull the trigger”

“I grew up believing that anything is possible. And when you’re not aware there are any limitations, nothing stops your from trying”

“Where there is scarcity, the price is no object. This basic tenet of supply and demand would later become a governing principle of my investment principle”


Other Articles of Interest:

Why market crashes are buying opportunities

A clear Illustration of the Mass Mindset In Action

Inductive Versus Deductive reasoning

Mass Psychology Introduction

Comic Strip Illustrating Mass Mindset

Mass Psychology or Contrarian Investing

Contrarian Investing

Contrarian Investment Guidelines

Fashion contrarian 

7 rules for contrarian investing