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Contrarian Investing

Contrarian investing is buying against the current wisdom or trends on Wall Street. It is also referred to as buying against the crowd.

Many time proven strategies like Value Investing and the Dow Dividend Theory are based on the contrarian investing philosophy. The issue with contrarian investing is that it goes against the efficient market theory. Efficient market followers believe that all information and risks are known immediately and factored into stock values, as well as any other assets. In essence, there are no bargains, because all liquid assets are fairly stated at all times. 

The contrarian investor believes the opposite: investors’ reactions move market prices, causing inefficiency in the system and creating opportunities to find good values.

Contrarian investing is very hard to follow. Contrarian investing is really opportunity investing. One cannot anticipate all the odd economic situations that just happen. For instance, I was involved in a few contrarian plays that you really could not have predicted.

·        In the early 1990’s, when the Mexican peso was being devalued and investors were running away from Mexico as fast as possible, I took a position in Grupo Televisa at the bottom. Luckily, it paid off when the crisis was over and investors returned to the Mexican markets.

·        A few years later, I was watching TV and there was a run on the banks in Moscow. When I told my wife I was going to “invest” in Vimple Communications, the Moscow cell phone company, she just gave me a sarcastic look saying “more hard earned money being flushed down the toilet.” Luckily, that hunch paid off. However, my wife’s expression and comments are the reasons why contrarian investing is successful: many people just don’t want to be humiliated in front of their family, friends and co-workers if they are wrong. They just pass on a good opportunity.

·        When SARS broke out in Asia, and pictures of people wearing facemasks were plastered all over the news, this was another contrarian opportunity from which to benefit. The panic eventually subsided and stock prices went back up. Most importantly, however, the Asian people avoided an epidemic.

I have found contrarian investing to work in a foreign market crisis, only if you buy quality franchises at low prices and have the patience to wait for the market emotions to turn positive. The main practice I always follow when these types of opportunities present themselves is not to take an extreme position.

Contrarian investing works because people tend to over react to situations, causing stock prices to fluctuate, then eventually return to normal. These emotional swings create buying opportunities in the process. 

 

 

 

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