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
What is an important truth which very few would agree on with you? These questions force individuals into thinking outside preconceived standards, Picture everybody thinking the same thing and you think about something completely different that seems to be very significant.
What is the contrarian question in zero to one? ›
Zero to One deals with Peter Thiel's contrarian question: “What revolutionary truth do you know that no one else agrees with?” If you know something, especially something important, that nobody else does, then by definition, you have a secret.
What is the Peter Thiels question? ›
Contrarian/Idea Question
Thiel favors contrarian founders and often asks them: "What important truth do very few people agree with you on?". He firmly believes that "Great companies have secrets: specific reasons for success that other people don't see."
What important truth do very few people agree with you on zero to one? ›
In his book Zero to One, he devotes an entire section to this question because it is intellectually difficult. Brilliant thinking is rare, but courage is in even shorter supply than genius. So, what important truth do very few people agree with you on?
Is being a 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 are examples of contrarian? ›
Examples of contrarian in a Sentence
As an investor, he's a contrarian, preferring to buy stocks when most people are selling. These examples are programmatically compiled from various online sources to illustrate current usage of the word 'contrarian.
What is the Contrarian Peter Thiel about? ›
'The Contrarian' by Max Chafkin showcases Peter Thiel's journey from co-founding PayPal to becoming a billionaire venture capitalist. It explores his unconventional approach to business and highlights his belief that going against the grain is the key to success.
What is Peter Thiel's law? ›
What Happened: “A startup messed up at its foundation cannot be fixed,” Thiel told his student Blake Masters at Stanford in 2012, a quote known as Thiel's law.
What is the advice from Peter Thiel? ›
Eight Things I Learned from Peter Thiel's Zero To One
- Each Moment Happens Once. ...
- There is no Formula. ...
- The Best Interview Question. ...
- A Company's Most Important Strength. ...
- The Contrarian Question. ...
- Progress Comes From Monopoly, not Competition. ...
- Rivalry Causes us to Copy the Past. ...
- Last can be First.
Going from zero to one means going from nothing to something. This is the greatest leap possible — greater than going from one to 10 or even from one to 100. To go from zero to one is to conjure something into existence from the dark void of oblivion. This is the essence of true innovation.
It's like creating something from nothing, a unique and valuable creation that sets us apart from others. Innovation is at the heart of “Zero to One,” and it is not just about making minor improvements to existing ideas. It's about pioneering something entirely new and groundbreaking.
What is the main point of zero to one? ›
'Zero to One' suggests that businesses should prioritize innovation over globalization. The book argues that true value is created through unique innovations, not by simply expanding existing ideas or products to new markets.
What is a contrarian statement? ›
adjective. 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. These companies are places where strong-minded people with contrarian points of view do well.
What is a contrarian argument? ›
An argument which dismisses one proposition by emphasising another one.
What is a contrarian opinion? ›
a person who takes an opposing view, especially one who rejects the majority opinion, as in economic matters.
What are contrarian ideas? ›
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.
