Contrarian investment
Quote
”Be fearful when others are greedy, and greedy when others are fearful”
- Warren Buffett
Strategy in which investors purposefully go against prevailing market trends by selling when others are buying and buying when others are selling. Warren Buffett is a famous contrarian investor.
Contrarians believe that people who say the market is going up only do so when they are fully invested and have no more purchasing power.
- Meaning: Market is peaked
- When people ‘predict a downtrend,’ they’ve already sold → market can go only up at this point.
Markets are subject to herding behavior augmented by fear and greed.
According to David Dreman, investors overreact to news in “hot” stocks and overprice them, and underestimate the potential of distressed stocks.
Contrarian investing is similar to value investing because both look for stocks whose share price is lower than their intrinsic value (or above).
Important to remember
- Being a contrarian investor requires a significant amount of time
- Good skills with fundamental analysis