Contrarian Investing: What? Why? Who? And How?

March 27, 2020

The time to buy is when there is blood in the streets

– Baron Rothschild

What is contrarian investing?

Contrarian investing, as the name suggests, means to go against the crowd and to be sceptical of the general market sentiment. Contrarian investors purchase and sell shares against the prevailing market sentiment. 

Contrarian investors usually invest in depressed cyclical stocks with low or even negative earnings with the expectation that these stocks will rebound once the company’s earnings have turned around, resulting in substantial price appreciation.

Overreaction by the masses presents opportunities

Most investors tend to overweight recent trends and follow the crowd with their investment decisions. This tends to cause an overreaction to the prevailing trend. We have documented this in our 2003 published journal

When this happens, more often than not, a company’s stock will appear cheap compared to historical levels or the stock of other companies with similar business models. A contrarian investor, noting this discount, buys the share and profits as the share price appreciates back to historical levels. 

Smart money and professional investors employ contrarian investing

Some of the most famous investors globally swear by contrarian investing. Many professional investors employ this strategy. 

Here are some of the more famous contrarian investors and their stories.

Warren Buffett invested USD 11 million in the Washington Post when they were at a deep discount in 1973. He eventually sold his stake for USD 1.7 billion in 2015 – giving him a return of 15,300% vs. the S&P 500’s comparatively 1,700% gain.
In 2002, Marty Whitman purchased K-Mart bonds for only 20% of their value just before it filed for bankruptcy. K-Mart eventually emerged from bankruptcy. Whitman’s bonds were exchanged for stock which soared 8 fold over the next two years.
Just before WW2 Sir John Templeton bought shares in any U.S. stock trading below USD 1 as he believed that the war would fuel the economy. Sure enough, he was right and his original investment grew by 4 times over the next 4 years.

Make your own contrarian strategy with Crea8

In Factor based thematic investing, Crea8 empowers you to be a contrarian investor in multiple ways:

Creating unfashionable theme

You can create an unfashionable theme by limiting your investment universe to certain sectors and countries. This exposes you to the stocks most affected during that time.

Tilting portfolio to value

There are many ways to construct contrarian portfolios: book‐to‐market, cash flow‐to‐price, earnings‐to‐price, past returns and other sophisticated valuation models.

Contrarian investors are most interested in undervalued investments. From your unfashionable theme, you can tilt your investment style to adopt our off-the-shelf ‘Value’ tilt or create your own flavour.

Search by sentiment

Crea8 analyses social media posts and news for sentiment. From there you can extract the required stocks that fit the extreme negative sentiment. 

Crea8’s Advice

Crea8 can help you pick out today’s unloved stocks that could blossom into tomorrow’s next big investment. Check out our Factor based thematic investing service to see how you can do this.

If you want to learn more

For further insight into our investment methodology including our Factor based investing methodology, check out our white papers.

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