What does it mean to be a contrarian investor?
Holly Warburton talks to the Guernsey Press Business Panel
Contrarian is an investment style where the investor goes against the popular market opinion; entering the market when most investors are cautious and cashing up when the majority are bullish and momentum is running high. This is summed up nicely in a quote by Warren Buffett - “be fearful when others are greedy and greedy when others are fearful”. What makes it contradictory is that it’s human nature to want to invest in markets which are going up, particularly if everyone else is positive, and sell in falling markets as protection, in case it falls further. By following the consensus there is also a level of comfort that ‘we’re all in it together’; but it is this that can lead to unfounded market movements and opportunities for the contrarian investor.
One example of this is the dot-com bubble; due to the rapid rise of internet at that time, investors were keen to buy into the sector at any cost. As more and more investors entered the market, stock prices continued to rise over and above what these stocks were actually worth and when reality hit and the growth didn't meet expectations the market corrected itself in a sharp drop, made worse by investors panic selling at the same time. It would have taken conviction to go against the rest of the market at this time but by avoiding the short term hype, one would have fared better over the longer term, particularly if the market crash had been used as an opportunity to buy some of the better quality stocks at a cheap price.
It sounds like a fail-safe strategy – just doing the opposite, but it’s important to fully understand the company you own or wish to invest into in order to establish its true value before you gauge whether the market is under or overvaluing it.
GP Business Panel 15 June 2017