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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.
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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.
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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.
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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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