Category Archives: Contrarian Investing Strategies

Relative P/E, P/CF, P/D and P/BV Strategy

Contrarian Investing Strategy Two

This strategy looks at relative industry strength.  The lowest P/E companies within an industry regardless of how high or low the general price of the industry group. The advantage of this strategy is that buying the lowest values stocks in each major industry opens a much larger investment universe than just using strategy #1. The relative industry method can be used with the entire market.  The relative contrarian strategy has more diversification by industry than strategy #1.  Looks for companies that have greater than 20% discount to its peers. Also used are the Low P/CF (Price relative to Cash Flow), P/BV ( Price …Read more »

Contrarian Investing is a Rational Approach to Investing

Contrarian Strategies

Contrarian Investing uses an investing methodology that is based on the principle of ‘rationality’.  To be a rational investor, there is a need to be realistic about both the upside and downside to any investment.  An investor must first recognize the tendency to be both over-optimistic and over-confident in his or her investment decisions. An investor must also recognize the tendency to over-rely on so called ‘experts’ for investment decision making. The Contrarian methodology is rational because it attempts to determine if an individual company, industry or even an entire market is over-priced (irrational exuberance) or under-priced.  A contrarian remembers that there were large periods of time …Read more »

Taking advantage of Irrational Behavior Strategy

Contrarian Investing Strategy Three

This strategy is a variation of strategy #1. It looks at relative industry strength and investor sentiment. Indicators Down by 50% off 52 week low Bottom of cycle “Maximum market pessimism” Low relative Price/Earning Low relative Price/Sales Low relative Price/Book Low relative debt-to-equity Interest coverage ratio Cash flow A Contrarian stock  Down by 50% off 52 week high. We talked earlier about how the media over focuses daily on individual companies and sectors. One thing that can be done is to listen to the popular press with an ear tuned for these extremes. Phrases such as “disaster”, “doomed” and “dead” …Read more »

Defensive Investing Strategy

Contrarian Investing Strategy Four

There seems to be a lot of talk about stock dividends and other fixed income investments.  Dividend paying equities have always been core components of any contrarian’s portfolio.  Contrarians by nature are part-active and part-passive. Before making a stock selection, the intelligent investor should keep two key concepts in mind.  First they should question, whether they are investing or speculating with regards to a purchase that is made.  Secondly they should question, whether a stock selection is good value by fully understanding the concept of margin of safety – the difference in market price versus underlying value. The single most important intellectual development of …Read more »

The low P/E, P/CF, P/D and P/BV Strategy

Contrarian Investing Strategy One

Findings show that companies in which the market has high expectations, as measured by the above ratios, have consistently performed the worst.  The reason is, that a market premium is paid for near term ‘visibility’ on earning prospects.    To evaluate the value of a company, forecasts must be made with extreme accuracy into the future.  We have already discussed this earlier – this is very difficult to do.  Investors and analysts also have confidence and optimism that earnings expectations will be met.  Over-confidence about information and forecasts, a reliance on ‘experts’, and over-optimism leads to a deadly combination. This is something …Read more »

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