So You Want to be a Contrarian Investor?

You've probably heard it many times before.

"The real money is made by contrarian investors".

The real money was made by people who bought oil at $12 a barrel.

The real money was made by people who shorted the Internet bubble when everyone else was buying.

The real money was made by people who shorted the top of the real estate bubble when everyone was still piling into the market (Paulson Credit Opportunities Fund anyone?)

It sounds easy enough. Hindsight is 20/20 and you can probably look at these three examples that I listed and say "I could see myself doing the same types of moves."

The big question - do you have what it takes to be a contrarian investor?

Do you like to go with the crowd or go against it?

Could you, for instance, start buying the US real estate market when everyone else is still full of doom and gloom?

Did you buy financial stocks such as Lehman Brothers and Merrill Lynch when it looked as though they were about to go out of business in February?

Could you short gold or oil right now, even if you knew in your heart of hearts that it was near a top?

Contrarian investing is very difficult. The saying goes, with great risks come great rewards. Are you able to take a position and watch it go 20% against you? Are you able to withstand this loss, even when you are hit with a barrage of daily news that would make you doubt your initial position? Do you have the backbone to stick with this position even though everyone else seems to be going in the opposite direction?

That's contrarian investing for you. Making a bet against the popular direction of a stock or market. Betting that the majority of people are wrong and you are right. Betting that the "herd" is getting in right near the top of a market. Betting that they are about to pay the price, and you are about to reap the rewards.

It certainly takes a certain mindset to make it as a contrarian investor. You need to have backbone. You need to have conviction. You need to be able to tune others out, as the din of the opposing side will be at its highest when you enter your position.

Do you have what it takes?

Filed under: Stock Market Education | General Knowledge