Contrarian Investing: When There’s Blood in the Streets
“The Time to Buy is When There’s Blood in the Streets”
As Baron Rothschild rightly said in the 18th century itself, has become the motto for contrarian investors around the world.
The quote by Rothschild originally was believed to be, “Buy when there’s blood in the streets, even if the blood is your own”, which he implemented himself by buying in the most serious time after the battle of Waterloo during the panic.
The belief that when things seem worse in the market is the best time to make a move and profit is considered to be the soul of contrarian investing.
If you are new to the world of investing, we would suggest you to take it slow.
Let’s see what the contrarian investing strategy is and how it is similar to value investing.
WHO IS A CONTRATARIAN?
Think about a contrarian as an investor who tries to earn a profit by deviating from the herd and investing when the market seems to go down and sell when others are buying.
The crowd, in such cases, tends to overreact to the market’s condition without analyzing it carefully which leads to a maximized increment or decrement of the prices allowing the contrarians to profit more than the general investors.
Read on to find out more about this type of investing that suggests you buy or sell in extreme conditions and why.
In simple terms a contrarian is someone who buys when others are selling and sell when others are hoarding up to avoid subsequent losses, it sounds simple, but is it really?
Let’s find out.
Now that you know who a contrarian is, it will be easier to understand the process of Contrarian Investing.
Contrarian Investing is nothing but a strategy that is characterized by buying and selling goods in opposition to the prevailing market situations.
With this strategy, a contrarian dives into the market and buys a stock at times other investors are getting rid of their stocks at a significantly lower price and vice versa.
Sometimes the stock price is exploited so much that it exaggerates a company’s risk and belittles its prospects of rising back to its value.
Identifying and selling such stocks can lead to extremely heightened profits when the company gains back its popularity, conversely when the price of a stock is skyrocketing it is common that there will soon be a drop leading to loss, at such times the contrarians get rid of such shares when stockholders are accumulating them to avoid future costs.
However, contrarian investing is not simply about undervaluing or overvaluing the conventional stock market but about grabbing the opportunity when it presents itself without any fear.
Such opportunities may occur when the market is greatly falling or rising.
More candidates are identified when a market fluctuates greatly (fluctuation can be positive or negative).
The mutual mindset of contrarians is that the worse things seem in the market, the more opportunities appear to profit.
The result for such investment is, for example, a contrarian frequently buys cheap security that others think is a dog and sells a security that everyone else is demanding for.
You must have heard the term value investing?
It is often used synonymously with contrarian investing but is it the same? Find out!
Contrary to popular belief, both, contrary investing and value investing have their differences, but a common similarity is that contrarians often value invest.
Wondering how the graph of a contrarian investor would look like? Here is an example.
WHAT THEN, IS VALUE INVESTING?
It is when investors try to find stocks trading at values lower than their intrinsic costs and jump at such opportunities to make huge profits later on when the stock price hits the ceiling.
For this, the investors must be patient, and it may mean that they’ll be holding the stock for a while.
However, the higher profit makes it worth the wait.
The idea is buying a mispriced stock and waiting until eventually, the stock price moves closer to the intrinsic value or above that, at such times the value investors sell the stocks that they got at the cost of stones at the price of gold.
FINDING THE RIGHT VALUE OF THINGS
Value investors are always looking for bargain deals which may result in earning more than their initial investment; they buy companies when their stocks are priced below their original value allowing themselves the best chance of profiting from their investment.
It may seem unnatural, getting more by paying less but that’s what value investors do, in simpler words, value investors exchange a 5-dollar bill for 20 dollars as you’re buying something that is worth more than the company is charging.
Benjamin Graham, the father of value investing, advocated an approach he liked to call ‘the cigar-butt approach’ to investing where he bought potential companies that couldn’t meet their intrinsic values and invest in them until they reaped profits.
He compared this approach to a cigar-butt he picked up from the street that had one last good puff left in it, taking a drag from it and then throwing it away, this way both the company which other investors would often overlook would get an investor and Benjamin would get one last drag (of their profit).
DON’T MESS WITH A CONTRARIAN INVESTOR
Contrarian investors, on the other hand, are like that annoying friend, who does the exact opposite of what is advised.
Contrarians bet against stocks that are priced more than their cost and also stocks that are suitable for value investing (obviously).
Value investors are often contrarians, and they know what time is best to buy stocks at bargain prices when most investors are fearful and act oppositely by selling stocks at cheaper values.
Contrarian investing is more of a strategy or an approach to investing in extreme conditions whereas value investing is a kind of investing.
Now that we know about the father of Value investing, let’s learn about the Wizard or as they call him ‘Oracle of Omaha’, and largest shareholder of Berkshire Hathaway, Warren Buffett, and his investing strategy.
Buffett meddled with the traditional concept of value investing in making it his own, and rightly so as he is now one the richest people in the world.
He says in an interview, “It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price”, which makes it clear that Buffett is a value investor on the contrarian side that loves to hold stocks until the maximum period before getting the best price.
When everybody thinks alike, contrarians see the full picture and invest in the opposite possibility.
Where value is investing can be identified by using financial metrics, such as the price to earnings ratio, contrarian investing also identifies the sentiments regarding the stock among other investors such as trading volume and earnings forecast of a company and its business prospects.
Here is a look at what some contrarian investors have to say.
Now, let’s get back to contrarian investing as a whole and discuss the factors and rules contrarians abide by to make successful investments.
THE TOP ASPECTS TO CONSIDER TO INVEST RIGHT
Here are some factors that every contrarian must consider before making investments and why.
1. Popular Sites and Magazines are a No-No
Material and information that everyone else is using to invest are completely useless for contrarians. They are in fact ‘contrarians’, they must go contrary to the popular flow and make a profit in the process.
Popular websites, magazines, newspapers, and TV stations should be treated as irrelevant while investing and must be considered only if you plan to go against what is said in such sources.
If most people are buying in you must not buy in, consider it like that, if you’re on a bandwagon that is overloaded and about to buckle under the load, it would be wise to get off that bandwagon.
These sources must be used as a guideline to avoid mainstream investments.
2. Don’t Fit In
Contrarians always stand out, they go against the herd and make the most out of it, by critically analyzing different possibilities first.
Being a loner helps in contrarian investing while taking a position.
Getting approval from others would be impractical if what you wish to do is stand out, and if the crowd automatically approves what you are doing then you must reanalyze your strategy from scratch.
3. Leave Warren Buffett Alone
Let’s be honest. All those mantras from Warren Buffett are great, but you’re not him (not yet of course).
Buffett invests using money from different sources and not his own, holding on to shares for a long time is not advisable as your funds will be blocked during the time.
Let’s face it, Buffett has tons of money which he can put on hold without affecting him, but you as a beginner cannot do that.
His ideas are all great but not suitable for beginners and people with limited funds.
So, all those ‘Warren Buffett’ ideas you penned down while researching on the internet, hold on to them and not your shares.
Agility is key, buy stocks hold on for a while and then sell without wasting any time so you can invest in a new position.
4. Don’t Hold On (forever)
Don’t invest in something and get attached to the position that is counterproductive in any type of investment.
Think of it as a piece of paper that you must eventually get rid of in order to increase your productivity in the share market.
It’s just an investment, close positions quickly and moves on where the grass is greener only then can you dare to be different than the masses.
5. Look at the Turnaround Time
The market changes almost rapidly and with fierce aggression, wait for such opportunities and don’t let them affect your investments by financing companies that are doing good and improving at a decent pace.
There are several such companies out there which investors often overlook or undervalue based on misjudgments and general hatred among masses; contrarians work hard to find exactly such companies which are being undervalued for all the wrong reasons.
Don’t mistake these factors for the rules that you must follow, they are binding, but the rules are definite.
There are some similarities between these aspects and the rules contrarians follow, but the factors are not all that you must consider.
Let’s look at what else contrarians do to make the most out of their fearsome investments.
KEY RULES TO INVEST RIGHT
Here is a beginners’ guide to investing you might want to check out.
We will also talk about some of the other investing tips below.
Nothing Popular Helps Directly.
Flush out all the popular sources and trends out of your options.
Going against the flow is essential for contrarians to win big at the end and following the herd is not the way to go.
These magazines and newspapers are like toilet paper for investors, they serve a purpose but that’s it, they’re not the contrarian’s bible.
The only thing their information is good for is that it helps contrarians to counter what is trending.
Analyzing the technicalities is important for any investment, take some time to study the basic tenets of the investment field and sectors.
Focus more on the less popular principles, the efficiency of these tenets is surprising after you understand how different tenets, like business and value tenets, operate.
Understanding the market is another crucial aspect of contrarian investing know as much as you can about the field and sectors you are playing in.
The market changes at an abrupt pace and being quick on your feet is very important to make smart investments.
Be Smart: Follow a Plan
Be practical and create a blueprint before you dive into the market because once you invest, there’s no turning back.
Don’t enter the market blindfolded; chances are instead of hitting the jackpot you will likely lose everything.
The plan must include an individual entry and exit plan in case things don’t go as you intended them to, which is mostly the case with investments.
Know When and How
Don’t jump in without thinking and then repent, understand when the time is right to buy and when you must get rid of the stock you’ve been accumulating.
Do not use all of your funds in trading shares as chances are; you’ll lose everything, do, it is better to hold on to most of the funds and invest in shares which you are sure (or almost sure) about after researching about the trends.
Now that you know all the what and ifs of contrarian investing let’s find out more about the phenomenon, its importance and how contrarian investing (which seems so simple) can be dangerous.
WHY IS IT IMPORTANT?
As popularly said by contrarians, “Be fearful when others are greedy and greedy only when others are fearful”, contrarians do exactly that, they buy when other investors are selling and sell when others are buying, it sounds simple, but now you know that it really isn’t.
Buying and selling shares during a crisis is very beneficial as it leads to either the price going as low as it gets or completely hyped up which is the point of investing in the share market if you think about it. Such investors (contrarians) are ready to go against the crowd and put everything online to win big in the long run.
When traditional investors are panic-selling, contrarians are taking advantage of this drop in the price to buy more shares, and as they say after every night a new day dawns, the dropped prices after a while, when the company’s worth is realized, rise up resulting in substantial growth.
Contrarian investment can be looked at as a long-term investment strategy with benefits higher than general and short-term investments.
Contrarians never bet for the present; they bet for the future and in a dangerous market where others are generally doing the opposite of what the contrarians intend to do.
Traditional investors do not agree with the strategy of contrarian investing, but that is something that contrarians see as a sign that they’re on the right track.
RISKY ENDEAVOR – UNDERSTANDING THE INHERENT RISKS
As simple as it sounds, there are certain risks associated with going against the flow with contrarian investing, let’s discuss some of them in this section.
1. Overpowered by the Herd
As discussed earlier, the concept behind contrarian investing is waiting for the prices to get too high or too low, which sooner or later they will.
Like contrarian investing there is another concept of ‘Momentum Investing’ which is the opposite of it.
In momentum investing, investors go with the herd and invest where most people are investing; this may create problems and long waiting period for contrarians.
When investors start leaning towards the crowd, it means trouble for contrarian investors as the momentum investors are inclined towards the forces that the contrarian went against.
A similar situation arose in 1996, when the stock prices reached to dangerously high levels, making many contrarians sell before they had intended to and when this occurs, it generally continues for years as a trend.
2. It Gets Lonely
Let’s face it, contrarian investing means you’ll be winning when others are not satisfied.
It is human nature to want to do what others are doing, contrarians must go to great extents to resist that urge and stay put on their original decision.
If you give up your contrarian shares before the intended rise in stocks, then chances are (more than less) you will be in huge debts.
There will be times when you wish to banish your initial plan and begin following force (other investors), but this may result in disastrous situations for you.
3. The Crowd is Not Always Wrong
It is common practice for contrarians to believe that the stocks where the majority of people are investing are always overpriced.
This may not be the case at all times, not everyone is stupid, if many investors are following the same pattern then the odds are generally in their favor and just a single per cent leaning towards you, and honestly, those are not really good odds.
The crowd can be right at times, but it is also wrong, it is up to you whether you’re willing to take a risk.
4. Overestimation of One’s Ability
No doubt contrarian investors are smart but perhaps too smart, and this is what gets in their way.
They try to rationalize every big fluctuation the market faces and make mistakes as not every big trend means an opportunity; you must know when to buy and sell.
You cannot always tell where the market will take you; it is only a matter of time that all your dreams are crushed with a curveball the market throws at you.
Contrarian Investing requires a mixture of precise judgments and just the right amount of smartness if you think you can hack it then give it a shot and see just how difficult it can be.
Contrarians take risks when they buy or sell shares opposing the natural flow of investors, but with proper planning and implementation (and of course, patience!) they are the ones making the maximum profit.
The quote “Buy when there’s blood in the streets, even if the blood is your own” describes this investment strategy rightly, as that is true when the time is right to buy and hit a home run.
This trading approach requires a lot of discipline and is not advised to individuals who are impatient as it requires them to wait for a long time.
Contrarian investing has its downsides, like any other investing strategy; however, with the high return rate, it is highly advised to become a contrarian if you have the capital.
Go against the flow and test your skills and luck at the stock market.
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