Be a contrarian and make money

Anil Rego

MANY of us invest without paying attention to the investing style suitable to us. It is important have a certain style and consciously align your investments inline with your overall philosophy.

Of the numerous investment philosophies around the world; the three most common ones are – Growth, Value and Contrarian Investing. Now, let’s take a closer look at the ‘Contrarian Investing Style’, subsequently we will consider the purpose of this style with various investment instruments.

Growth Investing style
Growth investors tend to invest in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earning or price-to-book ratios. It is one of the most sought after style of investing, especially, amongst the novice investor. It often uses the buy-hold strategy, and is an inherent long-term outlook (relatively) while conducting investment via this style.

Value Investing style
Value investing is an investment paradigm that derives from theories on investment and speculation. The pioneers of “Value Investing” style are Ben Graham and David Dodd. This investment philosophy is in most ways diametrically opposite to the Growth style. This style involves buying securities whose shares appear underpriced by some form(s) of fundamental analysis – it is often confused with the contrarian style of investing, however, this style is principally different and sticks close to the fundamentals of the stock – the emotion / sentiment of the market will not necessarily play as important a role as in the case of contrarian investing.

Contrarian Investing style
A contrarian is one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong. Contra Investing works on the premise that mob like behavior among investors can lead to exploitable mispricings in securities markets. There are many notable contrarian Investors, most popular ones being – Warren Buffet, David Dreman, John Neff etc., Although a contrarian may also look at the P/E and P/BV as in the case of Value Investing style, he focuses more on the ‘sentiment’ to get a pulse of the market momentum and tries to position himself such that he is not with the crowd when there is a definite trend reversal.
Contrarian Investment strategies
The contrarian investor need not always blindly act in counter point to the current market trend. He however almost always bets against the common wisdom, hoping to make a killing.

Contrarian investing is often used synonymously with ‘Value investing’ – Value investors focus on the fundamentals and buy and sell on the basis of assets’ prices relative to their intrinsic value. A contrarian however scouts for assets’ which have a predictable price pattern; a unidirectional price movement let’s say upwards, making a trend reversal and an eventual turnaround – they work on the premise of negative serial correlation of prices.

There is greater emphasis on independent thinking – the market is essentially run by mass optimism or pessimism and the contrarian awaits the euphoria to achieve its peak and gets out. Contrarians behave according to what is rationale rather than what is fashionable