Believe it or not, Contrarians are not alone in their investment beliefs, although at times it feels like it.
It is not easy to be a Contrarian minded investor, in today’s fast-paced and get-rich-quick ideological investment environment.
One of the most difficult aspects of a contrarian strategy is the strategy’s execution. As investors, we face uncertainty when we invest our capital. It represents our savings and our financial security. An investor suffers the ultimate consequence of an erosion of capital when a bad decision is made.
The success of a contrarian investing strategy requires the investor to go against gut reactions, and against the prevailing beliefs in the general market. Going against the crowd, is not easy to do. This is why most investors don’t do it.
But this is also why most investors and financial managers do not beat the performance of the market index. Most of us, are influenced by societal pressures (co-workers, friends, family), that encourage the social norm. Deviant thinking from the norm is difficult because of the lack of positive reinforcement for doing so.
The reality is that a contrarian strategy takes time, discipline and patience — and most investors will give up on contrarian investing in the short run because there is optimism somewhere else in the market. Most people are drawn towards exciting new concepts and ideas with a hope for an investment home run. This home run approach is just not realistic as can be seen in the latest technology bubble and burst.
Still, most investors who try contrarian investing will not be able to stick it out for the long term, simply because of these optimistic and pessimistic psychological influences.
In summary, Contrarians live by the following rules:
- We concentrate on turnaround situations, and stocks currently unpopular but likely to regain popularity in the medium to long term future.
- We focus on stocks that have the ability to appreciate in value – by using the Contrarian strategies.
- We analyze management’s ability to achieve stated goals and take the appropriate action.
- We invest only in organizations that have existed for at least ten years.
- We stay up-to-date on current events; focus on key, out-of-favour industries; and shop for bargains which allow for optimal returns.
- We normally sell 50% of a stock upon achievement of our rational target price, while “market timing” the remainder.
- We practice patient, longterm investing, while ignoring the daily fluctuations of the market.
- We advocate strict diversification in our portfolio.
- We remain independent and skeptical of every broker, corporation or financial institution.