How to identify profitable contra investments using the proven contrarian investment strategy?

Investment

oi-Sunil

By Sunil Fernandes

Published: Saturday, November 9, 2013, 9:22 [IST]

We are all familiar with the nuances and subtleties' of "rowing against the tide" or "sailing against the wind". Undertaking to do things which are in contrast to the usual is reflected in the above quotations. In the world of investments, when someone chooses to go against the prevailing market by buying assets which are not doing well and selling those stocks which are supposedly in the ‘pink of health', the investor is practicing ‘contrarianism'.

What is Contrarian Investing?

Contrarian investor identifies contra investment opportunities and follows contra investing by using proven contrarian investment strategies. The contrarian may invest in ‘contra stocks' as well as ‘contra funds' which follow ‘the contrarian approach'.

Thinking behind Contra Investments

The profile of a ‘contrarian investor' reflects the idiosyncrasies of a person who thinks differently. If a Bollywood cliché be borrowed to describe this tribe, then ‘contrarians' belong to the ‘zara hat ke' (removed from the normal) group of people.

This group of people who follow contra investing feel that when the market is going up it is because people are fully invested and no further purchasing power exists with them. On the other hand, when a downturn is predicted, people have already sold out their stakes, therefore at this point the market can only go up.

They think in contrary to the market. That's contrarian approach. This makes them identify successful contra investments.

Sir John Templeton on ‘Contrarian Investing'

Sir John Templeton, is rated highly as a contrarian investor and the story of his rise is an interesting one, but more about that later. What Sir Templeton had to say about ‘Contrarianism' is very apt- ‘To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit'.

In a single sentence he explained about contrarian investing very clearly. This is the basic principle behind the contrarian investment strategy. If you follow this one principle you can easily identify the profitable contra investments.

Essential elements of contrarian investment strategy

As per Howard there are two primary elements to contrarian investing:

I. Noticing some quality that others fail to see or appreciate and is thus not reflected in the market price. If something uncanny or out of the ordinary comes to notice- for example a technology which has great potential in future, but is still being developed, then it could prove to be a gold-mine if one has the foresight to invest in it.

II. Finding that the market vindicates the investor's faith. At times we are apprehensive about our ability to assess a situation currently. We are pulled back by self-doubt yet bet on an investment and it turns out to be a winner. This is what it is about vindication of faith.
The above two elements are the guiding factors behind formulating a successful contrarian investment strategy.

Successful traits for ‘Contrarian Investing'

Being a ‘contrarian' investor requires a lot of courage. The characteristic traits of such contrarian investors require an insightful, skillful and incisive second level thinker's ability. One who can think out of the box and keep away from consensus portfolios. Conventional wisdom has to be kept aside, Buffet is very specific on this "long on conventional short on wisdom".

The contrarian has the ability and confidence to tell the world that the market is wrong in its assessments, as it is at times; the ability is derived from the contrarian-investor nature and the confidence stems from the fact that they possess a strong sense of "intrinsic value" and "a margin of safety".

To be successful with contrarian investing these traits are very important. Develop these traits in you and acquaint with investors who have these traits in them. If you could work on this one thing seriously, you will become very successful at contrarian investing sooner or later.

The article is written by K. Ramalingam. He is the chief financial planner at holisticinvestment.in, a leading financial planning and wealth management company.