The Contrarian Investor
Do not try to be a contrarian, if it feels like you constantly have to make an effort then you fall under the “fashion contrarian” category. This usually happens because you woke up one day, read a random article on the subject, it tickled your fancy and there and then you decided that this was something cool. Contrarian investing is not about being cool, it is about doing stuff that is not cool. Hence being fashionable goes against everything a true contrarian stands for.
Your focus should be on standing apart from the crowd; doing things that the group does not find fashionable or acceptable. Regarding investing, this means getting into investments that are not considered hip or that is not on the crowd’s radar screen. This saying we coined is apt for this occasion
“be wary when the crowd is joyful and happy when they are not”
Fashion contrarians embrace anything that appears to be contrarian
The keyword in the above sentence is “appears”; contrarian investors do not embrace a site or some strategy just because it has a contrarian bent. They check the details of the strategy and then compare it to their ideology and if there is a match they will look deeper into it. Fashion contrarians don’t even know what contrarian investing entails; they are just enamoured by the concept, so any snake oil salesman can come along and sell them a nice story.
Understanding the Contrarian Investing Methodology takes a bit of time and work
First of all, most of the so-called contrarian websites are nothing but contrarian fashion sites. They are just repackaging old ideas and spinning them for the most part. You have to spend the time to understand which sites contain useful data and which sites do not. This means putting aside a certain amount of time every week to find out 2-4 websites that contain data that is not being broadcasted on the popular financial sites. If it’s too popular, it means that you are coming in towards the end of the party.
If you combine the concept of contrarian investing with the concept of Mass Psychology, you take the whole game to another level. The field of mass psychology is not widely known regarding it being applied to the financial markets. There are a few places that are putting out this information, but for the most part, they do not understand the principles of mass psychology well. Often these sites confuse contrarian investing in the principles of mass psychology.
List of things The Contrarian Investor Should Consider
Don’t look for investment ideas on Popular sites
if you are trying to get investment ideas from these sources, 9 out of 10 times, you are going to lose money. These sources should serve as guidelines for what investments to avoid as opposed to getting into
Do not try to be part of a group
in other words, you should be a loner when it comes to taking a position. If you are seeking approval from the crowds, then most likely you are making the wrong decision.
Do not speculate
contrarians do not speculate until they made money and even they are careful about doing so. Only use profits to speculate and only deploy small amounts of capital into speculative investments.
Do not buy the Warren Buffet nonsense mantra of buy and hold until the end.
You will never get the special deals he gets and he is playing with other people’s money and you are not. There is no such thing as buy and hold forever. There is buy and hold for some time and then fold and open a new position
Do not fall in love with your investment or get emotional over your position.
You need to be indifferent; it’s just a piece of paper and when the time comes you close the position and move onto greener pastures.
The Contrarian investor focuses on turnaround situations
In other words, a new trend is about to begin or end (more aggressive contrarians will short stocks and the market when the trend changes course). One of the key things they look for is well-financed companies, that are growing at a decent rate and that the markets are undervaluing for the wrong reasons. The masses are either ignoring these stocks or openly dislike them.
Contrarian investing is a stable form of investing; contrarian investors do not rely on experts to help them arrive at a decision. They already know what they want and when they spot it, they methodically start to open positions in that stock. Again there is no room for emotions at all.
We have explored the concept of contrarian investing in this recent article titled seven rules for successful contrarian investing
Why Do most individuals lose money in the Markets
Most people when they think about “stock picking” they are combing through a newspaper or their eTrade account and hunting for “winners.” And this process of hunting for winners typically involves reading CNN Money, picking up hot stock tips from your idiot co-worker, and outright guessing
Legendary investor Benjamin Graham described the stock market like so:
In the short run, the market is a voting machine, but in the long run, it is a weighing machine.
He said this because the market is basically millions of people pushing individual stock prices up and down with their buys and sells, like up-votes and down-votes in a Reddit thread. When investors believe a stock is actually worth more than its current listing price, they buy. When they believe it’s worthless, they sell. The idea is that this will eventually cause a stock’s price to settle to somewhere around it’s “real” value.
The problem is, it didn’t take long for Wall Street to realize that unsophisticated retail investors (i.e. us) are easily manipulated, and they soon figured out ways to exploit that. They’d find ways of getting access to news stories before they go public, or worse, completely fabricate stories themselves by leaking fake crap to the press, then get into positions that make them money as the retail investors (us) flood in, then use options or short selling to make money as the stock plummets when everyone discovers the stories were all hot air. They rig the market by manufacturing volatility, then profiting off that volatility. Full Story
Contrarian Investing Ideas to explore
As Oaktree Capital Management’s Mr Marks so aptly puts it, “The ultimately most profitable investment actions are by definition contrarian: You’re buying when everyone else is selling (and the price is thus low) or you’re selling when everyone else is buying (and the price is high).”
Now, don’t get me wrong. Heading west when everyone is going east doesn’t guarantee success, but it tips the risk/reward balance in the investor’s favour, setting up an asymmetric bet
Second, put restrictions on how far you’ll vary from your SAM. If you feel compelled to invest in an industry you know (or work in), or pursue a locker-room tip, then put limits on how far you’ll go. If gold is the only thing that makes you feel comfortable, then make it 5 per cent to 15 per cent of your portfolio, but not 50 per cent. Whatever the strategy, it has to be done in the context of a diversified portfolio.
Third, be sceptical of new product offerings. Make sure you understand how they will help you implement your SAM and why they’re better than what you already own. Rather than searching for something new every RRSP season, I’d suggest looking inside your portfolio first. Allocating RRSP and tax-free savings account contributions to securities and/or funds that have been lagging is the move of a contrarian. Full Story
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