Retirement Investing

Contrarian Investing: Going Against The Tide

Contrarian investing is the famed approach to investing against popular consensus in the hope of making a substantial return. Unlike value investors who seek to justify share prices on the basis of intrinsic value, contrarian investment philosophy allocates a weight of importance to investor psychology or other variables that do not support popular consensus. With history providing a many examples of asset bubbles and collapses that defy the conventional laws of value investing, the contrarian investment approach definitely has some degree of merit.

Contrarian investment strategies are sometimes adopted by investment managers who grade stocks according to fundamental criteria to justify purchasers that are in out of favor sectors or stocks. This is where the line between contrarian investing and value investing can become blurred. Common assessment factors include low price to earnings ratios, low price to book ratios or a high dividend yield. The prevailing assumption with this form of analysis is that stocks reach critically undervalued levels and subsequent mean reversion will ensue. This approach can be justified from both a value and contrarian perspective.

Contrarian investment strategy can be a very useful approach when extreme negative sentiment grips the markets. As the saying goes 'Buy when there is blood in the streets'. The time of maximum opportunity is when there are no buyers to be found and asset prices are depressed due to unfavorable economic events. The contributing fear that grips participant's minds contributes to indecision and guarantees prices remain low. In time, as investment conditions improve and investor sentiment rises, market gains can be realized by prudent investors who had the fortitude to invest at the most opportune time.

To learn more about the specifics of contrary investing, several books have been published on the subject. 'Extraordinary popular delusions and the madness of crowds' by Charles Mackay is perhaps the most well known. In this book, Mackay provides detailed accounts of the history of human behavior and tales of greed and despair. This book is great reading for any investor who want some insight into the classic mindsets and madness that can grip the investing public.

Why does contrarian investing have merit?

Human conditioning and social acceptance always gravitates towards the majority being right. History has proven that when dimensional shifts occur the crowd is usually wrong. For this reason, contrarian investing strategies have a high degree of merit and are worthy for consideration as part of an investment approach.

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