The term “Contrarian Investing” might be familiar to all value investors. This term is not to be confused with the terms “contra” or “contra trading”, which refers to the buying and selling of shares within a few days (and without putting up any cash) in order to make a quick profit.
A contrarian investor is someone who aims to profit from the stock market by going against the conventional wisdom of crowds. The most famous contrarian investor of all times is perhaps Warren Buffett. He exercises his own independent thinking and hardly follows the crowd. In fact, I would say his actions are usually months if not years ahead of what everyone else is doing.
His words “Be greedy when others are fearful and fearful when others are greedy” describe this thought process exactly. In a recent article that Warren Buffett wrote, he mentioned that he is putting cash to work in the equity markets now – currently the best place he sees for his cash.
He also mentioned that while he can’t predict prices of stocks in the short term, he is sure that in the long term, all the fundamentally good companies would do very well.
A friend of mine whom I shared this with said that of course Warren Buffett could do this. After all, he is rich enough who can afford to lose money in the stock market. I would like to point out that Warren Buffett got rich by doing precisely this – being a contrarian investor.
To borrow a quote from Warren Buffett:
“If you expect to be a net saver (investor) during the next five years, should you hope for a higher or lower stock market during this period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they feel elated when stock prices rise and depressed when they fall. Only those who will be net sellers of equities in the near future should be happy at seeing stock prices rise. Prospective purchasers should much prefer sinking prices.”
The stock market is like a crazy market place where people turn up everyday to transact stocks. Sometimes, you have overly optimistic people willing to bid high prices. On other days, you have depressed people willing to sell what they have at whatever price they might get.
In the midst of participating in this market, it is important not to become one of the extremists. The extreme low and high prices are there for you to take advantage of should you need it. Otherwise, you can choose to ignore them!
One book that I read many years ago on this topic is Contrarian Investing. For the most of it, I would consider myself pretty much as a contrarian investor. I seldom chase hot themes and I like to buy things that nobody else is buying. Low liquidity is hardly an issue. As a retail investor with limited funds, the volume of transactions is more than enough for me to enter and exit positions with ease.
I remember this statement: “Buy when there is blood in the streets and banks are failing.”
I have never seen so much blood and fear in the street.
Big corporations (and banks) failing one after another. Bank runs. Long queues at AIA. The list goes on.
Among some of the people I talk with, very few people are still buying stocks. Some have even sold off their positions with the intention of buying back at a lower price. Many are holding cash. Cash is king.
Amidst all that is happening, I am happily adding on to my positions. And so are many directors of listed companies as you can see from the daily announcements filed to SGX.
I must say all these does not come naturally. There is always a strong instinct to join the herd and sell everything in fear.
Greed and fear are two drivers of the market. If you can conquer them, you will become a much better investor.