Warren Buffett says:
"What we learn from history is that people don't learn from history"
'Contrarian Investing' is very much the exception rather than the rule.
Most amateur investors involuntarily go with the "crowd." Call it lazy, call it what you like, but the majority of wannabee investors follow tipsters.
This herd mentality is great news for the contrarian investor (you), because you are going to be prepared to dig a little deeper and go against the majority by backing your own judgement.
In fact, if you are using Technical Analysis you can see this heard mentality in the form of volume at the top and bottom of a market.
Trading in shares can be a complex activity. That's why professionals like Warren Buffett, his mentor Benjamin Graham, Richard Wyckoff, John Templeton and any others put in an enormous amount of research before they invested.
Take all the grunt work that they have done and use it to make your own decisions, regardless of what the herd are doing.
Overall, be patient. Let the crowd chase rainbows. Wait for your opportunity.
Being different isn't as daunting as you think. You need only be better than average.
Develop your own strategy and outperform the majority of private investors who just follow tipsters and force the market into oversold territory.
Do not make the mistake of thinking that being a contrary investor means doing the opposite of what the crowd is doing. Far from it. Some of the time the crowd is right.
One of Warren Buffett's famous quotes really hit home with us, he said:
"Be fearful when everyone else is greedy, and
be greedy when everyone else is fearful."
Wow! What a quote. If we had a favourite quote (which we don't) then that would be it.
Our problem, and yours will be too, is that it's hard to sell a share when you're euphoric and it's hard to buy a share when you're terrified. This is where discipline comes in and that comes with experience.
Here are three suggestions you can put into practice to take out any emotions in your trading:
This strategy is one of our favourites. And it's not rocket science.
N.B. Do not go any further with any strategy until you have, with the help of data already available, identified such companies.
Here's the strategy: look for one of your company shares that has fallen out of favour. The type of stock you should have identified will be a liquid stock with a high market capitalisation, such as a FTSE 100 stock.
Our reckoning is that, no matter how oversold the company is, it will ALWAYS recover. It may remain oversold for some time, but, be patient because recover it will (assuming all the fundamentals are in place).
You see, we were browsing through a few back issues of our magazines and observed that the same companies kept cropping up in the best and worst performing shares. That got us thinking.
We know, for sure, that our research was diligently done. We had the right kind of share on our list. Perhaps its particular sector was out of favour. Perhaps there was some negative news. Whatever. The shares were clearly out of favour for one reason or another. Or maybe for no reason.
As true contrarians, we watch these companies and when we feel the time is right, we add them to our portfolios.
Moral of the story: identify the right companies and they will always be a buy (or hold). And perhaps, albeit rarely, a sell. The right companies are your "forever" stocks and as such they will always be a buy when they are unloved by everyone else.
Contrarian Investment Strategies by David Dreman
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The Sceptical Investor by John Stepek
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Beat The Crowd by Ken Fisher
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Short term movements in the Stock Market are the result of investor psychology. To be successful at Contrarian Investing means you need to understand 'Stock Market Psychology'.
Study the 'Stock Trading Legends' - past and present, as portayed on this website. Look at the "rules" they stuck to and model what they have done.
You don't have to be a genius to succeed. Like any good craftsman, just master the basics.
Become hugely knowledgeable in the companies that you follow and success will come your way. Warren Buffett reckons that throughout your lifetime, you only need to follow 20-30 companies. Who would want to argue against that?
Follow your intuition, gain confidence (but don't confuse confidence with arrogance), and it would be difficult for you to fail at 'Contrarian Investing'.