Many investors base their investment choices on current market trends. Ostensibly, following the market flow is logical. For example, if a particular stock appears to be doing well, it’s reasonable to believe it will continue to thrive, and a stock performing poorly shows less hope of being profitable. A contrarian investor, however, might argue that market performance doesn’t reflect the true value of an asset, and lower-valued vehicles may be the key to your portfolio’s long-term success.
Key Takeaways
- Contrarian investors make investment choices that defy current market trends.
- Successful contrarian investing relies on comprehensive research and vigilance over the market to identify mispriced assets and the ideal moments to buy or sell an asset.
- Contrarian investors tend to face less competition for assets and stand to realize greater long-term gains.
- Theoretically, contrarian investing can also decrease downside risk since investors have purchased their assets at lower price points.
What Is Contrarian Investing?
A contrarian defies common or prevailing opinions, attitudes, or trends. Contrarian investors, therefore, do the opposite of what most other investors do. They sell when others buy, and vice versa. It’s not coincidental, either. It’s a purposeful strategy that considers the motivations of investors when they predict an upturn or downturn in the market. Neither is the strategy purely instinctual; successful contrarian investing requires careful research and evaluation of market conditions to confirm the unconventional view.
Contrarian investing works on the premise that financial markets are susceptible to herd mentality. For example, when a stock goes up, this generally means that investors are optimistic about its growth potential. But optimism isn’t always accurate, and often a rise in a stock’s value results from mispricing. If the contrarian’s viewpoint is well-founded, therefore, the increase is temporary, and the stock price will soon dip toward its intrinsic value. Consequently, many investors who’ve held on to the stock may lose money.
The same applies to lower-valued assets. A drop in a stock’s price expresses pessimism for its future. If this is unfounded pessimism, the stock’s value should recover. Meanwhile, there’s a period when a share price is way below what it should be. That’s when a contrarian investor might buy up shares, each of which may represent a substantial gain upon recovery. They then sell the stock when it’s at or near its peak value, thereby validating the adage “buy low, sell high.”
The Characteristics of Contrarian Investors
Apart from acting against the consensus and market trends, contrarian investors tend to have several common characteristics:
- An independent streak: One of the common characteristics among contrarian investors is their tendency to make independent choices. What makes them alike is their inclination toward being different from other investors.
- Research: Research is fundamental to a successful contrarian investment strategy. The investor has a profound understanding of the assets they’re dealing with and the factors that inform their value. That requires analysis of resources, such as financial statements, historical industry trends, and general economic data, coupled with the expertise to understand everything.
- A long-term approach: Contrarian investors consider both the asset’s current value and its potential long-term growth.
- A patient, attentive approach: Contrarian investors only act when market activities align with the conclusions from their research. Their patience mirrors their attentiveness to market behavior, as they must be vigilant to identify the best time to buy or sell. Thus, they maximize their gains and minimize losses.
- An eye for opportunity: From a contrarian’s perspective, every negative event has the potential for an upside. For example, an avian disease outbreak might cause a dip in animal health stocks, but both the outbreak and the devaluation are temporary. The price may recover once the disaster concludes.
The Benefits of Contrarian Investing
Being a contrarian investor has several potential advantages. For example:
Less Competition
When other investors are pessimistic about an asset that you believe is mispriced, they won’t compete with you to acquire it. Consequently, you may add a valuable asset to your portfolio and negotiate for better terms, as in the case of real estate investing.
Decreased Downside Risk
Every asset carries at least some risk, but the contrarian approach could potentially lessen any shortcomings associated with the assets you acquire. For example, if you buy an undervalued stock, you’re purchasing it below its intrinsic value. In theory, that means that even if its value decreases further, your losses would be lower than if you’d bought it when other investors were optimistic.
Long-Term Performance
If you assume that a contrarian investor’s undervalued assets will eventually recover, the investor stands to make exponential gains in the long term. In that case, they may outperform the overall market.
How to Apply Contrarian Investing to the Real Estate Market
The real estate market, like financial markets, has ups and downs. To most investors, it has recently seemed mostly pessimistic. Due to rises in both mortgage rates and property prices, traditional investors have had a tough time finding affordable real estate to resell at a profit.
Fortunately, you can apply contrarian investing strategies to take advantage of these conditions. To begin, you must recognize a couple of tendencies in the real estate market. One is that real estate has a higher likelihood of value appreciation and less susceptibility to short-term volatility than stocks. Another is that it’s particularly susceptible to socioeconomic changes, especially in population density, economic development, and generational disparities.
Consequently, you could potentially realize sizable gains on real estate if you look for properties in areas that are currently unpopular or unfashionable. Places like New York City or Los Angeles offer little upside. Great cities though they are, they’re both too populated and well-developed to present growth potential. Look instead at cities that have relatively little in terms of current job and lifestyle prospects but may eventually develop into major metropolitan centers.
How Can You Reduce Risk and Increase Returns in Your Real Estate Financing Portfolio?
To minimize your risk and maximize your returns with a contrarian real estate strategy, be alert to the activities in midsize cities. They’re places that often have lower costs of living and offer a high quality of life. These are important growth factors because they can attract people from less-populated areas and those from first-tier cities.
To determine whether these cities have the potential for first-tier classification, take note of their municipal development programs. Look to historical examples to guide you. Oklahoma City is a good reference point. In the past 20 years, quality-of-life programs have helped to facilitate vast migrations of young people and hometowners back to Oklahoma’s capital. In that time, the city has also developed its downtown, established a professional basketball team, and become one of the country’s 20 largest cities.
Rise Above the Crowd
A bold contrarian strategy can help you rise above the crowd, and so can we. Consider signing up for our 360 Pro membership to access resources that can help you optimize your performance as an investor. In addition to valuable tools, workshops, and other informational vehicles, membership allows you to connect with experts who can guide you through real estate investment methods for growing your portfolio.
