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Kolkata: Contrarian investment requires great skills and an eye to spot future winners clearing the clouds of investor pessimism that surround a stock now. American-born British investor, banker, fund manager Sir John Templeton (1912-2008) is regarded as the father of contrarian investment. His motto was simple: “Buy at the point of maximum pessimism and sell at the point of maximum optimism.” That, more or less, is the kernel of the strategy of contrarian investing.
Hence, as the name implies, contrarian investment strategies deliberately go against the grain of the prevailing investor sentiment in the market. Contrarian investing principles can be applied to individual stocks, entire markets, or niche industries.
The point that one should remember is that it is a deliberate strategy employed when people are entering the stock market. However, it needs a great deal of skill to spot future winners when almost every investor continues to shun a stock.
It refers to an investment strategy in which investors, by design, avoid market trends. A contrarian investor could sell those stocks that others are buying in huge numbers and can buy those stocks that seem to have fallen out of favour. As the nomenclature implies, a contrarian investor chooses to consciously swim against the prevailing market sentiment about a certain stock. Experts point out that contrarian investing is an approach that can employed not only to stocks but also to entire markets, or even niche industries. The implicit assumption of a contrarian investor is that the value of a stock is below its intrinsic value and therefore, he/she is considering investing in it.
A contrarian investors can enter the market when the sentiment can be very negative. The art is to pick stocks that are under pressure with the sole intention of selling them in the future when the value is realised. A contrarian investor eschews herd instinct, and therefore, has to have a lot of stock picking skills and judge the fundamentals of a company, so that the proper stocks are selected for buying. Thus, there are a lot of similarities between contrarian investing and value investing. Both believe that if a stock has value proposition, it will eventually reflect in the market and they wait for that moment to realise the hidden value.
