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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.

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