Skip to main content

Investing Styles: Contrarian world of equity investing

IT IS a blend of value investing with aspects of behavioural finance. It tends to be bearish when the market is bullish and vice-versa. Welcome to the world of contrarians — who believe in going against the wind. Although it is never easy, remember what doesn’t kill you makes you stronger.

The-60 year-old (a contrarian investor) is a firm believer that to be successful, you should invest in out of flavour stocks or sectors that are not of prime interest to most investing community. Rather than investing in then popular sector stocks such as realty, banking and others invested a large chunk of money in sugar stocks in January, when the market was at its peak. His intellectual independence with a healthy dash of agnosticism about consensus views reaped dividends. Unlike the other sector stocks, which are bleeding right now, His decision to invest in sugar, stock saw his portfolio’s worth increasing by almost 30-40%.

Here’s an insight into the contrarian world of investing, what you need to know and how you can learn this art to be successful on Dalal Street.

UNCONVENTIONAL WISDOM

For the uninitiated, contrarian investing is based on the premise that a majority of investors (or consensus) are betting in one direction on the market or on a specific stock (or security) but these bets are wrong or unjustified based on the medium to long term outlook. Contrarian approach to investing has a different meaning.

He believes that being contrarian showcases your ability to identify companies that have robust business models which are fundamentally sound, but are grossly undervalued in the stock market. In such companies, the net profit margin is consistent and rising, general trend is upwards, book value is high, and the market price to book value is lower multiple. These stocks, in fact, belong to a sector that is likely to be on a growth trajectory in times to come.

IS IT PROFITABLE?

Contrarian investing, believe analysts, works both for investors who follow markets regularly as well for those who don’t, but only at certain times, and not always. There are many renowned investors such as Warren Buffett and John Marks Templeton who are contrarian investors, but following them may not pay dividends unless you are able to decode market dynamics. This approach requires the same, if not more, research into the stock as any other form of investing. Thus, if you do not follow markets, you should not invest directly, particularly contrarian investing.

The strategy, according to analysts, can be highly profitable, but only at key turning points like the turn of economic cycle or company business cycle. Most other times, contrarian investing may not yield gains and could actually result in losses. It is usually more profitable at the end of bull or bear markets. Also, you should do detailed research/ homework before taking a contrarian bet, because contrarian investing is only successful if you have superior information or research compared to the consensus.

Apart from this aspect of investing, the discipline of entry as well as exit and research while picking up, all go towards making an investment profitable. You shouldn’t forget that these investors tend to have higher profitable investments due to the discipline of research they seek before investment.

DECODING THE MATRIX

There are no strict rules to learn the contrarian way to investing. What you need is experience since this approach requires a strong information base. That’s why there is a famous adage — stock market is a place where people with money make experience, and people with experience make money. You learn the tricks through in-depth research and experience. Strong knowledge of valuation matrix and investment style would only help.

The detail lies in the definition. The simplest contrarian rule would be to invest when markets are low and there is general disinterest towards the stock market — which is a time like now. Apply the principle we apply in gold — we all like to buy gold when markets are down. So why don’t we apply the same principle to stock buying? Good stocks will always be good, they may not double your money in 20 days but they will multiply many fold in 20 years. Think about buying stocks like making an investment into ownership of business. Think about your investment as a seed you have planted to grow a money tree. Don’t treat buying stocks like buying furniture. However, thinks that you should read Benjamin Graham or Warren Buffet’s letter to shareholders of Berkshire Hathaway to understand the basic principles. There are many contrarian investing associations which have these principles. In fact, you can even search the Net to find them.

Popular posts from this blog

Tata Mutual Fund

Being a part of the Tata group, the fund has the backing of a very trusted brand name with strong retail connect. While the current CEO has done an excellent job in leveraging the Tata brand name to AMC's advantage, it is ironic that this was just not capitalised on at the start. Incorporated in 1995, Tata Mutual Fund remained an 'also-ran' fund house for around eight years. Till March 2003, it had a little over Rs 1,000 crore in assets and 19 AMCs were ahead of it. But soon after that the equation changed. It was the fastest growing fund house in 2004 and 2005. During these two years, it aggressively launched six equity funds, two debt funds and one MIP. The fund house as of now stands at No. 8 in terms of asset size. This fund house has a lot to offer by way of choice. And, it also has a number of well performing schemes. Tata Pure Equity, Tata Equity PE and Tata Infrastructure are all good funds. It also has quite a few good debt funds. The funds of Tata AMC are known to...

UTI Mutual Fund

Even though only a few of UTI’s funds are great performers, this public sector fund house has many advantages that its rivals do not. It has a huge base of retail equity investors and a vast distribution network. As a business, it looks stronger than ever, especially in the aftermath of credit crunch. UTI is, by a large margin, the most profitable fund company in the country. This is not surprising, since managing equity funds is more profitable than debt. Its conservative approach and stable parentage is likely to make it look more attractive to investors in times to come. UTI’s big problem is the dragging performance that many of its equity funds suffer from. In recent times, the management has made a concerted effort to improve performance. However, these moves have coincided with a disastrous phase in the stock markets and that has made it impossible to judge whether the overhaul will eventually be a success. UTI’s top performers are a few index funds, some hybrid funds and its inf...

Salary planning Article

1. The salary (basic + DA) should be low. The rest should come by way of such allowances on which the employer pays FBT and you don't pay any tax thereon. 2. Interest paid on housing loan is deductible u/s 24 up to Rs 1.5 lakh (Rs 150,000) on self-occupied property and without any limit on a commercial or rented house. 3. The repayment of housing loan from specified sources is also deductible irrespective of whether the house is self-occupied or given on rent within the overall ceiling of Rs 1 lakh of Sec. 80C. 4. Where the accommodation provided to the employee is taken on lease by the employer, the perk value is the actual amount of lease rental or 20 per cent of the salary, whichever is lower. Understandably, if the house belongs to a family member who is at a low or nil tax zone the family benefits. Yes, the maximum benefit accrues when the rent is over 20 per cent of the salary. 5. A chauffeur driven motor car provided by the employer has no perk value. True, the company would...

8 Investing Strategy

The stock market ‘meltdown’ witnessed since the start of 2005 (notwithstanding the recent marginal recovery) has once again brought to the forefront an inherent weakness existent in our markets. This is the fact that FIIs, indisputably and almost entirely, dominate the Indian stock market sentiments and consequently the market movements. In this article, we make an attempt to list down a few points that would aid an investor in mitigating the risks and curtailing the losses during times of volatility as large investors (read FIIs) enter and exit stocks. Read on Manage greed/fear: This is an important point, which every investor must keep in mind owing to its great influencing ability in equity investment decisions. This point simply means that in a bull run - control the greed factor, which could entice you, the investor, to compromise with your investment principles. By this we mean that while an investor could get lured into investing in penny and small-cap stocks owing to their eye-...

Debt Funds - Check The Expiry Date

This time we give you an insight into something that most debt fund investors would be unaware of, the Average Portfolio Maturity. As we all know, debt funds invest in bonds and securities. These instruments mature over a certain period of time, which is called maturity. The maturity is the length of time till the principal amount is returned to the security-holder or bond-holder. A debt fund invests in a number of such instruments and each of these instruments would be having different maturity times. Hence, the fund calculates a weighted average maturity, which would give a fair idea of the fund's maturity period. For example, if a fund owns three bonds of 2-year (Rs 30,000), 3-year (Rs 10,000) and 5-year (Rs 20,000) maturities, its weighted average maturity would be 3.17 years. What is the big deal about average maturity then, you may ask. Well, knowing a fund's average maturity is important because it tells you how sensitive a fund is to the change in interest rates. It is ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now