Why You Should Be A Contrarian Investor
Shares in Triassic Park are at an all-time low.
After the disastrous opening weekend, your colleagues have been frantically ditching their investments in the theme park company, while screaming about velociraptors and legal liabilities.
A chunk in the company that would have cost thousands a week ago can now be bought for less you spend each day in Starbucks.
But you’ve been watching Triassic Park through its rise and fall.
You know there’s some solid technology still in there behind the PR nightmare. As that new low price flattens out, you reach for your keyboard and buy.
Welcome to contrarian investing.
How to be a Contrarian Investor
According to the dictionary, a contrarian is someone who opposes or rejects popular opinion.
But of course, a true contrarian wouldn’t care what the dictionary thinks. In investment, contrarianism has a slightly more specific meaning.
Contrarian investors are less bullish than most about the investments that are on the rise.
Their attitude tends to be that, if everyone else is already shouting about the hot new thing, then everyone else is already invested in it.
That means the value has gone up so much that there’s little to be gained from joining in. They’re more positive about assets that are in a slump.
Many successful companies have periods of stagnation. All currencies dip from time to time.
Contrarian investors look for the moment when others are selling out of something fundamentally sound, when most commentators are calling it a bad bet.
Then the contrarian sweeps in and buys the asset at a bargain price, ready to sell it once others recognise its value.
Why Follow The Contrarian Investing Route?
Described that way, the merits of contrarian investment speak for themselves. It’s the ultimate in buy low, sell high strategies.
By bucking trends, you can potentially make far more on your investments than those around you.
So why does it even work? If something is so fundamentally obvious, won’t everyone do it?
Because human beings, like most of the inhabitants of that dinosaur theme park, are herd animals.
We’re easily caught up in the buzz that other people create.
Their enthusiasm helps us believe that something is true, and once we’re emotionally engaged, we seldom stop to address our assumptions.
Look at any online debate and you’ll see that fact checking isn’t humanity’s strong suit. That makes us prone to believing that the latest rising share is worth investing in.
Then there’s our ability to shift our beliefs to fit our behaviour.
Psychologists have shown that, contrary to everything we like to think about ourselves, we tend to act first and justify afterwards.
So once you’ve bought into a stock, you’ll explain to yourself and those around you why it was a good idea, adding to the hype.
All this is multiplied by confirmation bias, the tendency to both favour evidence that supports our existing perspective.
Once you throw that into the mix, it’s easy to see why people keep investing along the same paths, despite the more profitable alternatives.
Being Contrarian about the Contrarians
It can be hard to recognise this when so many people claim to go against the herd.
We’re taught to value independence of thought, and so we’ll find ways of playing the rebel card.
We’ll explain what a bold and daring investment we’ve made in such famously underappreciated brands as Apple and Nike, or how we made a radical play in gold, the most reliable long-term investment since Moses came down off the mountain and started melting down idols.
The fact is that many people present themselves as contrarian when they aren’t.
The proof of their approach is never in the way they describe it. It’s in the hard facts of what they’ve invested in and when they’ve invested in it.
Everyone investing in bitcoin during its spike late last year presented themselves as an innovator, even as they followed the herd into a devastating price drop.
Hedge funds were originally set up for contrarian plays, profiting from cynicism and companies’ declines.
But even they have just becoming one more part of the market, and their fees prevent investors from seeing the profits a contrarian position should bring.
Back to Triassic Park
Taking a contrarian investing position is a great way to boost your portfolio.
Even a small contrarian injection can help to insure you against the market contagions that follow a downturn.
Sure, it might sound mad to invest in Triassic Park while someone’s still mopping up the blood from that rampaging T-Rex.
But a year down the line, when the company are getting ready to open the new park, when the price is rocketing as other investors join in, then you’ll be ready to sell at a healthy profit.
And hey, you’ll probably get the chance to do it again three years later, and again, and again.
You know what these companies are like.
They’ll squeeze every last dollar out of their franchise.
And by not following the herd, you’ll get to make your profit too.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
