Best contrarian investing books
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They may do this even if some of those stocks are overvalued. Contrarian investing is not a short-term strategy, like you might see with day trading. Instead, contrarian investors buy and hold stock in companies or industries that align with their strategy.
And because of this, it could be months or even years before the stocks they are buying reach their perceived value. Contrarian Investing vs. Value Investing As mentioned, contrarian investing and value investing bear some similarities. In fact, some believe there is no difference between the two. Where the two are similar is the tendency to invest in undervalued assets. Both investors will look for assets that are trading lower than their intrinsic value.
Contrarian investors, on the other hand, pay more attention to investor sentiment. They may choose to buy an asset despite an overall bearish sentiment around it. Pros and Cons Contrarian investing has allowed some investors to make sizable profits by going against the grain. But like any strategy, they have their own set of pros and cons.
Contrarian investing pros: Contrarian investors often buy stocks in dependable industries that are trading lower at the moment, such as banking or real estate. By looking for discounts in these industries, they stand to gain a lot in the long term. Investing in assets that are trading below their intrinsic value allows contrarian investors to minimize potential losses. Contrarian investing cons: Because contrarian investing requires going against the grain, it could be years in some cases before these investments produce the desired return.
Finding worthy investments as a contrarian investor can take extensive research. Examples There are many examples of contrarian investors, and some of them have become quite famous. Warren Buffett Warren Buffett is a contrarian investor. In fact, he might be the most famous contrarian investor of all time.
Some call him a value investor. However, Buffett can be considered a contrarian investor because he does what he wants instead of following market trends. The reason? Conventional wisdom says investors should never have that much cash.
Even if it means investing in a less desirable asset. Michael Burry We often think about contrarian investors buying undervalued assets, and in many cases, that is true. However, Michael Burry became famous when he decided to short the housing market just before the Great Recession. Everyone was investing in mortgage-backed securities and other assets.
But Burry was determined the market was overheated and bet big on it. But, if a short seller does manage to time the market appropriately, these transactions could be highly profitable. It makes sense that these two investment strategies would be aligned since they fundamentally operate on the same principle — that herd mentality has obscured the actual price of an asset.
However, short selling tends to occur within a much shorter timeframe than contrarian investing, given the need to return the shares of stock to the broker that lent them. This type of investor typically waits to sell their holdings, believing that it is important to spend substantial time in the market , instead of trying to time their stock trades for the best moment.
A longer-term investment strategy like buy-and-hold can be beneficial — it assumes less risk than some forms of active investing, minimizes trading fees, and can defer taxes to a later date. But, long-term investments could cause the investor to miss out on potential gains that a more short-term investor might be able to capitalize on. Contrarian investors tend to share the long-term mindset many buy-and-hold investors use. Additionally, some of the necessary psychology is shared, as both types of investors must ignore the noise of short-term dips and spikes to take advantage of long-term growth.
But, buy and hold is inherently a passive investing strategy. In contrast, contrarian investing is an active strategy, meaning that contrarian investors must regularly track their investments and be ready to sell them when they judge the market conditions to be right — if they hope to beat the market. Value investors strive to find stocks trading for less than their intrinsic value, much like a contrarian would. Based on these ratios and measures, a value investor will determine if a stock is undervalued.
If it is, they are likely to purchase it. These types of investors tend to acquire large stakes in these companies, believing that they will profit over time as the rest of the market realizes that these stocks have been incorrectly priced.
Value investing uses much of the same approach as contrarian investing, capitalizing on the market undervaluing a technically sound asset. But unlike contrarian investing, value investors tend to take long positions and typically only invest in single securities rather than mutual funds or exchange-traded funds ETFs. In contrast, contrarian investors will look for profitable opportunities in long or short positions. Contrarian investors are also known to invest in more complicated financial instruments rather than reserving all of their investments for individual companies.
For starters, contrarian positions have the potential to outperform other investments and potentially even the market on a long-term basis. Moreover, contrarian investors may also experience personal satisfaction when their hard work and research pay off with a well-placed investment. Because the stocks that contrarians tend to buy are inherently undervalued, that can potentially give these types of investors a margin of safety, theoretically reducing their downside risk.
But, contrarian investing can come with some serious drawbacks. Investors could potentially miss out on market gains while their assets are tied up in a long-term investment strategy. There is also the risk of an undervalued stock remaining undervalued — either for an extended period of time or even forever. Contrarian investing is also a fairly unapproachable strategy for beginner investors, given the amount of time and research that the strategy requires.
Contrarians have to be prepared for regular periods where their portfolio underperforms compared to the overall market. They also have to have the patience to wait for their bets to pay off, ignoring the short-term noise from the stock market. For example, many investors in recent years have sold their shares in commercial real estate investment trusts REITs as pandemic closures hit commercial real estate especially hard.
However, a contrarian investor might see a potential opportunity to purchase these stocks at a steep discount, believing that commercial real estate firms will eventually bounce back at some point in the future. A contrarian might also use current economic events to shape their investment strategy.
For example, many contrarian investors encourage investing during a recession. While other investors are desperate to get their resources out of stocks and bonds during periods of economic strife, the contrarian might scoop up large positions in companies with strong fundamentals at a discount. While these macro-events could create potential contrarian investment opportunities, it is important to remember that a successful contrarian is still doing homework on any investment they make.
For example, while commercial real estate is likely to make a comeback at some point, not every single commercial real estate company is guaranteed to survive a prolonged period of losses. For any investor, it is impossible to know when the true bottom of the market has been found, and we all have to plan our level of risk accordingly.
Despite his contrarian viewpoints, Buffett is best known for being a value investor, meaning that he goes against the grain to find undervalued stocks and holds them until other investors realize their higher potential value. Another famed contrarian is Michael Burry, most well-known for betting against the housing market ahead of the real estate crash. More recently, Burry is credited with sparking the GameStop investment craze. This phenomenon arguably saw individual investors adopting a contrarian strategy en masse to raise the stock price of the failing company.
Ark Invest is particularly well-known for its focus on disruptive technologies, offering funds on artificial intelligence, DNA sequencing, gene editing, and electric vehicles, among others. What Defines Famous Contrarian Investors? Successful contrarian investors tend to share several qualities.
First and foremost, they must possess a deep understanding of the stock market and the industries and companies they invest in. This follows logically since one cannot go against the grain of investor sentiment without being intimately aware of what that sentiment is.
Secondly, to be successful as contrarian investors, we must be able to invest our assets into a potentially long-term position. So while we wait for our investments to pay off, we must be willing to forsake short-term gains that our assets could have made elsewhere in the market. Doing this requires a combination of both the psychological fortitude to ignore temporary rough patches and needs enough capital to be able to stay invested in our long-term bets.
This is simply not something that every investor can do — contrarian investors must have the time and the money to wait for their strategy to pay off. Finally, contrarian investors typically possess a natural curiosity and independent thinking. While these qualities are important, a successful contrarian investor knows that it is not enough to simply buy what others are selling.
Instead, a well-researched strategy is required to back up those intuitions. But, this investment strategy requires substantial amounts of time, research, and patience — something that not all of us have in equal quantities. That being said, a contrarian viewpoint and the fundamental analysis used to support that viewpoint can be easily applied to other investment strategies, ultimately making us stronger and more deliberate investors.
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