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Contrarian Investing Works

Written By Christian DeHaemer

Posted May 17, 2016

There are many tried and true methods when it comes to investing, but one which really has merit is called contrarian investing. Essentially, as a contrarian investor, you ignore what others investors are buying stock in. You do the opposite. You analyze low-cost stocks and decide if you believe the fall in the stock price was unjustified, and likely to bounce back.

As a contrarian investor you’d buy cheap stocks that other investors have written off, and then sell them when they rise again. If everyone thinks gold is a bad bet, you’d want to invest in it, and then sell it when it rises again. Say you bought it at a low price of $1,100 an ounce –with gold currently selling at $1,300 an ounce, you’d make a tidy return, and everyone who ignored it will look foolish.

You have to put a lot of research into the stocks you purchase, you have to bet against the crowd and stand by your own research. After all, it’s your money…

You need to make sure the companies you’re investing in are solid –that they’ve haven’t dropped price because of for a substantive reason. It would not have been a good idea to be a contrarian investor in Blockbuster, for example.

This is why you must understand the market you’re investing in, and go with a company that has delivered solid returns in the past and has a good historical record of management and decisions.

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Risk/Reward Factors

Of course, there are risks associated with contrarian investing, like any method. You could buy into stocks that stay the same low price for a while, so you have to be patient. You could do a lot of research in a stock that you think will eventually rise, but ends up being a flop.

That’s why being a contrarian investor is high risk/high reward. In addition to a company that flops, you could also do your research and invest in a company that is the next Apple. If you’d invested $1,000 when Apple had its first IPO, you’d have a return of over 31,000% today.

Read more about contrarian investing at The Tribube.

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Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.

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