Contrarian investing is a form of investing in which investors deliberately counter the trend by purchasing when most investors are selling and selling when most investors are buying. When others see the market negatively, a counter-investor enters the picture.
He believes that the market value or stock price is below its inherent worth and hence serves as a motivator. In essence, excessive pessimism on the part of other investors has caused the stock price to fall below where it should be, and the opposing investor must acquire that before the overall attitude improves and the share prices rise.
Contrarian investors' belief is comparable to that of value investors. Both try to purchase stock when it is selling at less than its true worth. However, contrary investors are more at ease with stocks of firms selling below their fundamental values for extended periods of time owing to negative market sentiment than value investors.
The argument behind contrarian investing
To begin with, contrarian investors join the market when sentiment is extremely unfavourable. They choose undervalued equities with the intention of reselling them when the share price rises. Other investors have also started to focus on the firm at this point.
A contrarian investor relies on the core premise that herd behaviour can influence the direction of the market's flow but is not always a wise way to make investments. Working as a contrarian might result in losing out on profits, though, when the market's general positive mood turns out to be accurate.
Against one's better judgement, one could wind up selling their investments as the market starts to rise. However, if the market attitude is still adverse, a company that contrarian investors are eyeing as a potential investment opportunity may continue to be discounted.
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Some well known contrarian investors
Warren Buffett- Warren Buffet argued that the contrarian approach is wise. "Be greedy when the others are fearful, and be fearful when the others are greedy," was his investment philosophy.
George Soros- George Soros is frequently referred to as history's greatest contrarian investor. While Warren Buffett may have made more money with this method, Soros is known for pushing the contrarian worldview to its logical conclusion.
Michael Burry- Michael Burry, who is portrayed in the popular film The Big Short, is most known for foreseeing the burst of the housing bubble in 2008.
David Tepper- Goldman Sachs is claimed to have only survived the 1987 market meltdown due to investor David Tepper. Tepper used the recession as a chance to buy banking institution bonds that had been damaged by the economic meltdown; when the economy recovered, the bonds' value skyrocketed.
John Neff- John Neff is seen as a contrarian by many people, though he probably disagrees with the label. Neff, who calls himself a value investor, discovered the most undervalued businesses in sectors that the market had ignored.
The contrarian investment technique is buying stocks that seem to underperform while the market's perception of them is still unfavourable. Though there might be risks associated with this attitude, it also serves as a fantastic entry opportunity for contrarians, who enter at a time when the market may shift course.