Contrarian Investing Philosophy

  • Contrarian Investing
  • 28 Apr 2017
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Contrarian Investing Philosophy

A Contrarian Investor, generally focuses on turnaround situations and stocks currently out of favor, practicing patience and long-term investing. 

Contrarian investors known as Contrarians looks for strongly financed, growing companies that are undervalued by the market for the wrong reasons, believing that the market will come to appreciate their true value over time.  This investing approach can also be described as Contrarian, since such stocks are purchased when most investors believe that they are unattractive.

It is also believed that by owning an undervalued quality stock, is a lower-risk method for seeking superior long-term returns. These stocks tend to be less susceptible to price declines in bear markets because expectations about their performance are already low.

In addition, these stocks may offer the benefit of a relatively high dividend yield, which provides the best protection against the downside of an investment.

Contrarians use a 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 their investment decisions.  An investor must also recognize the tendency to over rely on so called ‘experts’ for investment decision making.

Over Reaction:

A Contrarians methodology is based on the principal that simply — people over react.  This tendency for over reaction, can be seen in your day-to-day life through your work environment, home life or even while you are on your vacation.  People are highly emotional creatures – especially when it comes to love – and love for money.

The same holds true for investors — investors simply over react. Investors overreact to both good and bad news.  There is an internal psychological pendulum in people that moves between optimism and pessimism. 

Investors overprice the so called “best investments” as can be seen in the latest technology bubble, and under price the “worst investments” as can be seen later in our Contrarian examples in the members only area. 

  • Investors are simply too optimistic about stocks that appear to have good prospects.
  • Investors are simply too pessimistic about those that have so-so outlooks.

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