Thursday, April 15, 2010
Contrarian investing
There are various types of Investment Philosophies, which are sets of guiding principles that inform and shape an individual's investment decision-making process.
1.Value Investing: Seeking relatively undervalued stocks and believing they will eventually produce strong returns.
2.Fundamentals Investing: Identifying companies with strong earnings prospects.
3.Growth Investing: Buying into companies that have promising emerging products or services that hold promising growth potential.
4.Socially-Responsible Investing: Looking for companies that adhere to certain set of moral and/or ethical business standards.
5.Technical Investing: Examining past market data to look for hallmark visual patterns in trading activity to make buy and sell decisions.
6.Contrarian Investing: Making investment decisions in direct opposition to the market majority (selling when others are buying).
From wikipedia "a contrarian is one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong"
Contrarian theory
A contrarian investor believes that the people who say the market is going up do so only when they are fully invested and have no further purchasing power. At this point, the market is at a peak. On the other hand, when people predict a downturn, they have already sold out, at which point the market can only go up.
An investment style that goes against prevailing market trends by buying assets that are performing poorly and then selling when they perform well.
Contrarian investing also emphasizes out-of-favor securities with low P/E ratios.
Notable contrarian investors:
Warren Buffett is a famous contrarian, who believes that best time to invest in a stock is when shortsightedness of the market has beaten down the price.
David Dreman is a money manager often associated with contrarian investing. He has authored several books on the topic and writes the "Contrarian" column in Forbes magazine.
John Neff, who managed the Vanguard Windsor fund for many years, is also considered a contrarian, though he has described himself as a value investor.
Mark Ripple is a money manager often described as a contrarian. He has authored a book which covers the topic in detail.
In the words of Martin Zweig, in the forward of Ned Davis's "The Triumph of Contrarian Investing"
"The general theory of investor expectations thus develops: Whenever nonprofessional investors become significantly one-sided in their expectations about the future course of stock prices, the market will move in the direction opposite to that which is anticipated by the masses!
Someone is bound to be skeptical. Why should the market drop when the masses are extremely bullish, or why should it rise when nearly everyone is bearish? The answer is simple. Suppose the overwhelming numbers of investors (call them nonprofessionals) become rampantly bullish on the market. The logical extension of highly bullish expectations results in the purchase of stocks right up to the respective financial limits of the masses.
At the very moment when the masses become most bullish, they will be very nearly fully invested! They won’t have the financial capacity to do more buying. Who then is left to create demand? Certainly not the minority of investors we call professionals. It is that group which recognizes overvaluations, and presumably has been the supplier of stock to the nonprofessionals during the time that both prices and the optimism of the masses were rising.
Thus, when the crowd has become extraordinarily bullish, a dearth of demand exists. The non professionals are loaded with stocks and are cash-poor, while the professionals are liquid, but in no frame of mind to buy. Demand is saturated, and even minor increases in supply will cause stock prices to tumble. At this point, prices are a strong bet to go but down! Similarly, when the masses of nonprofessionals become heavily bearish, they panic and sell out. Supply soon evaporates and prices have strong odds to rise!"
Contrary thinking is emotionally demanding. It requires courage to stand alone when there is a great deal of pressure to follow the majority. The key to contrarian investing is making independent decisions and believing in them. And finally, it requires patience.
1.Value Investing: Seeking relatively undervalued stocks and believing they will eventually produce strong returns.
2.Fundamentals Investing: Identifying companies with strong earnings prospects.
3.Growth Investing: Buying into companies that have promising emerging products or services that hold promising growth potential.
4.Socially-Responsible Investing: Looking for companies that adhere to certain set of moral and/or ethical business standards.
5.Technical Investing: Examining past market data to look for hallmark visual patterns in trading activity to make buy and sell decisions.
6.Contrarian Investing: Making investment decisions in direct opposition to the market majority (selling when others are buying).
From wikipedia "a contrarian is one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong"
Contrarian theory
A contrarian investor believes that the people who say the market is going up do so only when they are fully invested and have no further purchasing power. At this point, the market is at a peak. On the other hand, when people predict a downturn, they have already sold out, at which point the market can only go up.
An investment style that goes against prevailing market trends by buying assets that are performing poorly and then selling when they perform well.
Contrarian investing also emphasizes out-of-favor securities with low P/E ratios.
Notable contrarian investors:
Warren Buffett is a famous contrarian, who believes that best time to invest in a stock is when shortsightedness of the market has beaten down the price.
David Dreman is a money manager often associated with contrarian investing. He has authored several books on the topic and writes the "Contrarian" column in Forbes magazine.
John Neff, who managed the Vanguard Windsor fund for many years, is also considered a contrarian, though he has described himself as a value investor.
Mark Ripple is a money manager often described as a contrarian. He has authored a book which covers the topic in detail.
In the words of Martin Zweig, in the forward of Ned Davis's "The Triumph of Contrarian Investing"
"The general theory of investor expectations thus develops: Whenever nonprofessional investors become significantly one-sided in their expectations about the future course of stock prices, the market will move in the direction opposite to that which is anticipated by the masses!
Someone is bound to be skeptical. Why should the market drop when the masses are extremely bullish, or why should it rise when nearly everyone is bearish? The answer is simple. Suppose the overwhelming numbers of investors (call them nonprofessionals) become rampantly bullish on the market. The logical extension of highly bullish expectations results in the purchase of stocks right up to the respective financial limits of the masses.
At the very moment when the masses become most bullish, they will be very nearly fully invested! They won’t have the financial capacity to do more buying. Who then is left to create demand? Certainly not the minority of investors we call professionals. It is that group which recognizes overvaluations, and presumably has been the supplier of stock to the nonprofessionals during the time that both prices and the optimism of the masses were rising.
Thus, when the crowd has become extraordinarily bullish, a dearth of demand exists. The non professionals are loaded with stocks and are cash-poor, while the professionals are liquid, but in no frame of mind to buy. Demand is saturated, and even minor increases in supply will cause stock prices to tumble. At this point, prices are a strong bet to go but down! Similarly, when the masses of nonprofessionals become heavily bearish, they panic and sell out. Supply soon evaporates and prices have strong odds to rise!"
Contrary thinking is emotionally demanding. It requires courage to stand alone when there is a great deal of pressure to follow the majority. The key to contrarian investing is making independent decisions and believing in them. And finally, it requires patience.
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