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Contrarian investing for beginners

Karl Loomes
·3-min read
Chart displaying growth
Chart displaying growth

In the past few months I have noticed what a contrarian person I am. Whenever the press is reporting something as fact, or my friends all hold an opinion, I look for the other side. I look for what they are not seeing or saying. I look for why they hold those views.

When thinking about this, I realised this attitude comes from my investing. I have spent more than a decade looking for the other side of a stock’s story. Going against the majority opinion. Thinking I am right when others are wrong.

Indeed I have made some of my best investments doing just this. Here is how you can do the same.

Contrarian investing

To be clear, contrarian investing is when one goes against the majority opinion. Whenever you buy or sell a share, you are by nature having a different opinion to the person on the other side of the trade. If you are buying it for some reason, another person is selling it for another reason.

But contrarian investing is more than this. It is seeing a share price tank and knowing it is now a bargain rather than a loser. It is hearing nothing but bad news about a company but knowing it is still fundamentally strong. Its timing the point when everyone else will realise these things.

Of course, contrarian investing is not always the best choice. Sometimes the market is right. Sometimes the bad news is the most important news. But very often, it is a good start to your analysis.

Opportunity guidelines

The opportunity arises for contrarian investors because the fundamentals do not always drive a share price. Nor is there always perfect information for everyone. Most of the time, it is in fact expectations dictating short- and medium-term share price movements. These expectations can be wrong.

So then, some guidelines to contrarian investing.

First, look for sharp price movements. Most shares, most of the time, will not move more than a few percentage points a day. If they are, why?

News-driven price movements can often be the best opportunities. Panic selling after some short-term event is a tell-tale sign of an amateur investor. Some problems are fundamentally trouble for a company. Many are not. As Warren Buffett said, be “fearful when others are greedy, and greedy when others are fearful”.

Consider if the story is fundamentally going to hurt a company’s future, and for how long. Even large events such as low oil prices and Covid-19 may be opportunities. Are we all going to be locked down forever? Will the fall in profits this quarter continue into next?

Be careful, however, as the old adage is true: “the market can stay irrational longer than you can stay liquid”. Contrarian investing is not just about knowing everyone else is wrong, but also about timing the point when everyone else will realise it.

Looking for a slow down in price declines can help here, as can an increase in more positive news stories.

Unfortunately there is no hard and fast guarantee to contrarian investing. But holding the attitude will be most beneficial. Next time you see a share price falling, ask yourself whether it is the right move.

The post Contrarian investing for beginners appeared first on The Motley Fool UK.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020