Acting on the opposing direction of the majority
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What is a Contrarian Investor?
A contrarian is an individual who acts in opposition to the majority. In terms of investing, a contrarian investor is someone who trades against prevailing market sentiments. When the market buys, the contrarian sells, and vice-versa. Contrarian investors look for opportunities to buy in a bear market and opportunities to sell in a bull market.
An Equity Research Analyst can use a contrarian strategy to look for assets that have a bearish prevailing market sentiment, and use Business Valuation Methods and Financial Modelingto evaluate if the stock is undervalued.
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Background
The idea is that behavioural bias during large swings in the market may lead to mispricing of some securities. Exaggerated optimism or pessimism can drive stock prices to extremes, by overstating or understating risk and return. Using a mixture of both Long and Short Positions, contrarian investing is similar to value investing, as both methods look for companies mispriced by the market.
Characteristics of Contrarian Investing
Recessions can be a good time to invest – 10 years after the housing bubble recession, the S&P 500 grew close to 200%. Entering into a long position when others are pessimistic about the market is a very difficult thing to do. However, in the words of Warren Buffett, “be greedy when others are fearful”. Being able to identify the behavioralbias of others, and avoiding falling into the same fallacies yourself, is key to sound value investing.
Long-termInvestment Horizon– if all positions are analyzed with the long-term in mind, volatility and short-term market swings are almost negligible, as the time horizon extends far past the short-term. Hence a longer-term investment horizon can be beneficial for contrarian investors.
Choose companies with strong financial fundamentals – The intrinsic value of a company is often masked by market swings and negative press. However, a company with strong fundamentals will usually prevail against temporary market sentiments and its stock price will inherently reflect that in the long-term.
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Five Famous Contrarian Investors
Here are five famous investors who used contrarian trading in their investment process:
- Warren Buffett – American investor, philanthropist, and CEO of Berkshire Hathaway (read why Warren Buffett dislikes EBITDA)
- Jim Rogers – American investor, chairman of Rogers Holdings and Beeland Interests Inc., and co-founder of Quantum Group of Funds with George Soros
- Marc Faber – Swiss investor and Director of Marc Faber Ltd, an investment advisor and fund manager
- Bill Ackman – American Investor, philanthropist, and founder and CEO of Pershing Square Capital
- George Soros – Hungarian investor, philanthropist, and founder and chairman of Soros Fund Management
Additional Resources
Thank you for reading this CFI guide to contrarian investing. Check out these FREE resources to learn more about Trading & Investing. Also if you are looking to advance your career you should take a look at Business Valuation Methods Course, part of the FMVA™ Certification.
Here are some other articles on relevant terms:
FAQs
a person who takes an opposing view, especially one who rejects the majority opinion, as in economic matters.
What is a contrarian mindset? ›
Being contrarian means you're creating an end point and working backwards, without even knowing how you're going to get to the “finish line”. Find out how to use the power of a contrarian mindset to your advantage.
Is contrarian good or bad? ›
This can be both a positive and negative label. The positive is that, sometimes, the contrarian view turns out to be correct. And, even when the future is unknown, the debate unsettled, a contrarian view serves to counter soft consensus thinking.
What is an example of being contrarian? ›
Apropos, a contrarian is a person who goes against something. The term is used usually in the investment sphere when one wants to define an investor who buys shares of stock when most others are selling and sells when others are buying.
What personality type is a contrarian? ›
Finally, call them contrarians or call them nonconformists, but an ENTP type isn't afraid to go against the grain—whatsoever. In fact, it's what sets them apart.
How to deal with a contrarian person? ›
In the moment, tell the person how it makes you feel when they try to override your opinion or feelings on an issue. “Say to them, 'When you say that it makes me feel ______,'” Smith said. “Ask them to respect how you feel by not taking such a confrontational approach when talking to you.
What causes contrarianism? ›
What drives contrarians to go against the grain so resolutely? Some are skeptics who have been burned by conventional ideas, such as the child of divorce who swears off marriage for life. Others use defiance to get attention. But many are looking to establish their own identities as distinct from a larger group.
Who are the famous contrarian thinkers? ›
Plato, Napoleon, Gandhi, Martin Luther King, countless others…all contrarians. Even though these people are famous for their outlier ways, a contrarian mindset is accessible to everyone.
How do you deal with someone who is contrary? ›
Validate their opinion, even if you don't agree with it and ask questions that require them to think more deeply about why they feel the way they do. Avoid criticism about them as individuals (their values and sense of self). This will almost certainly be perceived as an attack.
How do you know if someone is a contrarian? ›
Contrarians may be seen as courageous, unconventional, counterintuitive thinkers, able to withstand herding pressures and even abuse from crowd-following conformists. Others may see them as maverick, out-of-touch, denialists 'living on another planet' and unable to see the obvious.
contrary, perverse, restive, balky, wayward mean inclined to resist authority or control. contrary implies a temperamental unwillingness to accept orders or advice. perverse may imply wrongheaded, determined, or cranky opposition to what is reasonable or normal.
What is a contrarian behavior? ›
disagreed with by most people, or liking to express opinions that most people disagree with: Among academics in the field, she takes a contrarian view. More examples.
What is the mind of a contrarian? ›
A contrarian is someone who goes against prevailing opinions and trends. Being contrarian is about knowing when to go against the grain and when to go with the flow. “The key is to think independently, not just differently” (Shakir). The contrarian mindset is about being comfortable with discomfort.
What is another word for contrarian? ›
adverse antagonistic clashing contrary incompatible inconsistent opposing paradoxical. Strong match.
