Contrarian Stock Investors Look Beyond the Crowd
Do you always follow the crowd? Do you feel more comfortable going with the current flow - or do you prefer to go on your own regardless of conventional wisdom?
If this is your investing philosophy, you are what the stock market calls a contrarian. Contrarians look for stock investment opportunities on the opposite side of what the majority of the market is doing.
The idea of contrarian investing is that the crowd (most investors) is often wrong and they follow one another either driving the market up or down.
The classic example is stock investors become disenchanted with a particular stock (maybe quarterly earnings are disappointing). As they sell, others follow and the resulting selling pressure drives the stock's price past where it might reasonably be expected under the circumstances.
The contrarian notices the trend and does his research. If the contrarian spots a situation where a stock's price is driven below where it should be under the circumstances, the contrarian buys thinking he is picking up a bargain.
In many ways, contrarian investing is similar to value investing. In both cases, the stock investor is looking for mispriced stocks, that is, stocks that have been driven down by the herd mentality.
Both the contrarian and value investor look for these opportunities to pick up stocks they know are worth more at bargain prices.
Where they differ is the value investor most typically looks for bargains to buy, while a contrarian investor also looks for stocks that are dramatically over priced.
Just as the market herd can drive down a stock's price, the same mentality can drive up a stock's price to unsustainable levels. The contrarian, spotting an overpriced stock, will short the stock looking for a profit when the price collapses.
While some contrarians do very well in the market (Warren Buffett, for example), the crowd isn't wrong all the time. If you don't do your homework, you can have a very nasty surprise when you learn the herd was right.
Successful contrarian investors have a good idea what a stock is worth. When the stock is too high or too low relative to its actual value, contrarians may find profitable opportunities.
Don't follow the investing crowd and don't do the opposite of the crowd with no other information. Contrarians have a good sense (based on analysis) of what a stock is worth. They only make a move when the crowd clearly is going the wrong direction (buying when it should sell or selling when it should buy).
If this is your investing philosophy, you are what the stock market calls a contrarian. Contrarians look for stock investment opportunities on the opposite side of what the majority of the market is doing.
The idea of contrarian investing is that the crowd (most investors) is often wrong and they follow one another either driving the market up or down.
The classic example is stock investors become disenchanted with a particular stock (maybe quarterly earnings are disappointing). As they sell, others follow and the resulting selling pressure drives the stock's price past where it might reasonably be expected under the circumstances.
The contrarian notices the trend and does his research. If the contrarian spots a situation where a stock's price is driven below where it should be under the circumstances, the contrarian buys thinking he is picking up a bargain.
In many ways, contrarian investing is similar to value investing. In both cases, the stock investor is looking for mispriced stocks, that is, stocks that have been driven down by the herd mentality.
Both the contrarian and value investor look for these opportunities to pick up stocks they know are worth more at bargain prices.
Where they differ is the value investor most typically looks for bargains to buy, while a contrarian investor also looks for stocks that are dramatically over priced.
Just as the market herd can drive down a stock's price, the same mentality can drive up a stock's price to unsustainable levels. The contrarian, spotting an overpriced stock, will short the stock looking for a profit when the price collapses.
While some contrarians do very well in the market (Warren Buffett, for example), the crowd isn't wrong all the time. If you don't do your homework, you can have a very nasty surprise when you learn the herd was right.
Successful contrarian investors have a good idea what a stock is worth. When the stock is too high or too low relative to its actual value, contrarians may find profitable opportunities.
Don't follow the investing crowd and don't do the opposite of the crowd with no other information. Contrarians have a good sense (based on analysis) of what a stock is worth. They only make a move when the crowd clearly is going the wrong direction (buying when it should sell or selling when it should buy).
