Meaning of Contrarian Investing?

When they enter the market, there are many investment strategies that people use. Many of these strategies, from value investing to angel investing, are well-known by billionaires. Contrarian investing is one example.

What's contrarian investing ?

Contrarian investing is a method of investing that allows investors to deliberately avoid market trends by buying when others buy. Contrarian investors believe that those who claim that the market is heading upward only have less purchasing power than they do and are fully invested. This is when the market is at its highest. Therefore, when the market falls, the people who claimed it was going up have already sold their shares. The market can only rise at this point.

Contrarian investing strategies are, therefore, designed to go against the grain and prevailing investor sentiments in the market. Contrarian investing principles may be applied to specific stocks, whole markets, or niche sectors. Contrarian trading is when investors enter a market when there is a negative sentiment. Contrarians believe that the intrinsic value of a stock, or market, is currently lower than its actual value. This makes investing now a great option.

The stock price has fallen below its value due to high levels of pessimism, according to the contrarian mindset. Contrarian investors will buy shares before the market sentiment improves and the stock price rebounds. Contrarian logic can be seen when investors overprice 'hot' stocks while undervaluing distressed stocks. Overreaction can cause a small upward price movement. Or, stocks considered hot can fall steeply. This allows contrarian investors to choose stocks at lower prices.

Contrarian trading works:

First, contrarian investors invest in the market even if the sentiment is overwhelmingly negative. They choose distressed stocks to sell once the share price has recovered. Other investors began to target the company around this time. Contrarian investors believe that while herd instincts may control the direction of market flow, it doesn't necessarily make for great investing strategies.

But, if the market is bullish, it's possible to miss out on gains by working as a contrarian. If the market gains against one's better judgement, one can sell their stock holdings. Contrarians may target stocks that are undervalued as an opportunity for investors, but they can still be undervalued if the market sentiment is bearish.

Value investing vs contrarian trading strategy

Contrarian investing is very similar to value investment. Both have the same characteristic of choosing stocks that are undervalued by current market sentiment. It is assumed that the stock's intrinsic value will eventually be reflected in its share price. Value investors believe, like contrarian investing that the market is prone to react to good news and bad news. This means that stock prices can fluctuate in short-term, but not with long-term fundamentals.

Many value investors believe there is a fine line between contrarians, and value investors. Contrarian value investors are often referred to as those who seek out distressed stocks that appear undervalued relative to their intrinsic worth. Warren Buffet is an example of such a person. Warren Buffet advised investors to buy American stocks during the 2008 financial crisis. This seemed like the wrong thing for the market to do. Warren's advice made a steady difference, and ten years later the economy was functionally reborn.

Conclusion

Contrarian investing involves investing in stocks that are underperforming while the market sentiment towards them is negative. Contrarians can also benefit from this sentiment, since they are able to enter at a time when the market might change direction. Warren Buffet, the value investor, is often compared with contrarian investors. This quote by Buffet to be fearful when investors become greedy and greedy when they feel fearful is a classic contrarian principle.