How do you decide on stocks or funds to invest in? Maybe you’re not the type to take a big risk, so you go with blue chip stocks that have persevered for decades, like Pepsi or Royal Bank of Canada. That’s merely one investment strategy of many. But what about the investors that go against the grain? Their mentality goes something along the lines of “no risk no reward.” These individuals participate in contrarian investing.
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Wealth managers work with your personal values and risk tolerance to help you decide on investments that best meet your financial goals. We’ll walk through contrarian investing, its pros and cons, risks, and why you should consult a wealth manager to maximize your investment returns. Keep reading to learn more!
What is contrarian investing?
Contrarian investing is an investment style and strategy that entails choosing investment choices that contradict current market trends and assumptions. If the majority is buying, the contrarian is selling, and vice versa.
This style functions under the belief that the market isn’t always as high (or low) as people say it is. Instead of following the herd, contrarian investors choose less popular stocks that they see as undervalued or at lows in the market.
News headlines like “imminent market crash” or “all-time market lows” invite contrarian investors to come and play the market. They unveil negative sentiments for what they are: factors that lower stock price and opportunities to invest before an uptick.
Famous contrarian investor Warren Buffet captures the essence of the investment strategy with this quote: “Be fearful when others are greedy and greedy when others are fearful.” So, what can you gain from contrarian investing? Keep reading to find out.
Related Reading: Fear and Greed Index
What are the benefits of contrarian investing?
Contrarian investing offers a few benefits, like:
- Margin of safety: Buying when stocks are at market lows ensures your money doesn’t go toward anything below a stock’s intrinsic value.
- Big returns: Despite the chance of long waiting times, contrarian investors have the opportunity to gain big on their investments once a falling market goes back to normal.
- Comfort in research: Contrarian investors need to dedicate lots of time and research into honing their market expertise to successfully invest in this style. That research offers peace of mind and confidence even during the waiting period of a bear market.
If you want to see these benefits in action, just look to famous contrarian investors like Berkshire Hathaway founder Warren Buffet or infamous Big Short investor Michael Burry (more on famous contrarian investors shortly).
But can contrarian investing ever go wrong?
What are the drawbacks of contrarian investing?
Here are a few contrarian investing drawbacks you should consider before jumping into the market:
- Long game: Most contrarian investors aren’t in the market for short-term gains. Instead, you’ll have to be comfortable waiting months to years for your investment to be fruitful.
- Expertise required: You can’t go against the grain in the stock market just for the fun of it. Contrarian investors spend years studying the market and hours for each stock they’re considering. This makes it an intimidating investment strategy for beginner investors, since they might not have the knowhow to pull it off successfully.
- Opportunity cost: Since your money might be tied up in a long-term investment, you’ll have to be comfortable without that access to capital for a while. This could hinder you from pursuing other financial opportunities as they arise throughout your contrarian investment.
Still, history has seen many contrarian traders find success and wealth despite the above drawbacks. Let’s take a closer look below.
Related Reading: What are options?
Who is a famous contrarian trader?
You might remember the name Michael Burry from the infamous Big Short movie. Based on a true story, the film chronicles Burry’s successful prediction of the 2008 market crash and subsequent financial success after betting against it on the market.
His firm, Scion Asset Management, is still practicing contrarian investing today, most recently betting against S&P 500 and Nasdaq 100 with $866 million through his fund Scion Asset Management. That’s over 90% of Burry’s portfolio. We didn’t say contrarian investing was risk-free!
Another famous player in the contrarian investing world? Warren Buffet. The Oracle of Omaha is famous for finding low-priced shares at just the right time.
Plus, you won’t find him investing in anything that he doesn’t understand. While plenty of investors have found success with crypto, Buffet’s research still doesn’t offer him enough insight on the digital currency so he posits that it’s not the right investment for him. This is quite demonstrative of the intense research and expertise a contrarian investor seeks to obtain before touching a stock. Furthermore, it demonstrates the concept of investing in what you know and understand — a tried and true tactic.
But you might wonder whether you have the expertise or capital juice to actually turn a profit with contrarian investing.
Is contrarian investing profitable?
Yes, contrarian investing is profitable as long as you have the time and energy to research stocks inherently before buying. In fact, it tends to be more profitable than other strategies because of the level of risk involved. While there’s greater reward with greater risk, you also might lose everything on a single bet if you’re not wary.
Some examples of stocks decreasing in share price these past few years include commercial REITs, big banks, and international ETFs, which could present successful opportunities for appreciation in the years to come. In other words, these are perfect opportunities for contrarian investors.
Of course, it helps to have a trusted wealth manager by your side to help you identify which types of stocks and investments might pose too much risk. Furthermore, they can help you conduct research and find useful information before you buy. They can also help you diversify your portfolio to minimize the risk of your contrarian investments.
And speaking of risk…
Is contrarian investing risky?
Yes, contrarian investing always poses a risk because it’s not a commonly used strategy and it’s difficult to execute. You can always pick the wrong investment, even if you conduct stellar research to understand your options. As a matter of fact, even the best of the best investors still make bad trades from time to time. The goal is to profit overall, but sometimes you’ll eat a loss.
Plus, some contrarian investors wrongfully get excited over any stock that’s plummeted, thinking buying low will result in a high gain down the road. But if that gain never comes? You’ve wasted time and opportunity cost along with your original investment. That’s a part of contrarian investing unfortunately. No one can predict the future!
Bottom line? Contrarian investing isn’t for beginners, but the risks could be outweighed by rewards if you know what you’re doing.
Does contrarian investing work?
Any investment strategy or style can work as long as it’s paired with the right financial circumstances, values, and expertise. Meaning? You don’t have to go at it alone. If you’re a risk-tolerant individual with a penchant for researching stocks and understanding markets deeply, contrarian investing might be a great fit. However, you risk serious loss if you jump in unprepared.
Why not have a highly rated, certified wealth manager by your side as you go through your investment options? Wealth Management Canada connects investment-eager Canadians like yourself to reputable wealth management firms and independent managers on its platform. Ready to make big gains with contrarian investing? Start your journey with a wealth manager today!