Be it public opinion, fashion trends, or expressing one’s own opinion, when a person chooses to not follow the stream but rather forge his or her own path, he or she will almost invariably face resistance, and sometimes even significant losses. The latter is especially true in business; a capitalistic economy comprises a vast number of market trends emerging and vanishing every couple of months. Since capitalism is based on the balance of supply and demand, rather often, when a new consumer trend appears, many business professionals choose to invest in it while it is popular—such an approach guarantees income, and when the trend dissipates, there is always something new to invest in. However, there are also business professionals who do not like jumping into a hot stock, preferring a stable and coherent manner of managing business instead of chasing gains. Such people do not usually invest in novelties; on the contrary, they prefer investing in areas that are not trendy, but which can, if adequate effort is made, bring in income as well. Such an approach is called contrarian investing.
To be more precise, contrarian investing implies searching for market areas that are currently underdeveloped or have fallen out of public favor, and opting to invest in them and develop them, rather than chase profits possible to gain from in more “popular” or trendy market segments. Why? Because when a market “wakes up,” and attention is being paid to such unfavored segments, a contrarian investor will already be there. He or she would have already invested in it, consolidated his or her positions, and would be ready to satisfy the demand (MoneyWeek.com). For example, nowadays, almost everyone is using smartphones, having forgotten about push-button cell phones. Why would anyone want to use them when smartphones provide more possibilities? However, at the same time, there are many people who prefer old-fashioned buttons over trendy touchscreens. For example, elderly people may find it difficult to use hi-tech gadgets, and would appreciate a device capable of only making phone calls; or, people with dull sight (including, once again, elderly people) might need push-button gadgets with huge digits, symbols, and letters, so that they would never get confused by a tiny, unreadable font. Besides, smartphones are too fragile; an iPhone will not work in temperatures under -20C, for example, and if you drop it, it will break easily. At the same time, there are many people who need strong and reliable communication devices: alpinists, rescuers, builders, engineers, and so on. They often need waterproof and unbreakable phones capable of working in extreme conditions—and in these terms, even an ancient Nokia 3310 is better than a smartphone. So, considering all this (as well as a variety of other factors) a contrarian investor would invest in developing push-button phones and advertising them appropriately.
Contrarian investing can be seen as the aerobatics of business, as it requires an entrepreneur to possess specific skills, intuition, and analytical abilities, as well as the willingness to take risks—and the risks are many. For example, if you are buying a company that has reached its bottom, it does not mean that it will eventually grow; rather often, there is a depth to fall into even further. Besides, the time and resources you will need to make your investment profitable can be extensive. A contrarian investor must be able to both analyze the market properly, and to adequately evaluate his or her resources and capabilities (Barclays).
A person planning to invest on a contrarian basis should consider certain principles. It is not enough to simply choose an unpopular segment of the market and pour money and resources into it. There are multiple factors an investor should be aware of; the following are the most basic ones. First of all, for a contrarian investor, it is important to remember that mass media cannot be a source of actual news: in the financial world, by the moment something hits newspaper headlines, the prices have already reacted and adjusted accordingly. Therefore, it is crucial that a contrarian investor does not rely on news sources, but is able to analyze and foresee market fluctuations in order to be one step ahead of the headlines and react to these fluctuations in time. It also matters to act oppositely to market trends; simply put, you need to buy when everyone is selling, and sell when everyone is buying. This way, you can gain prospectively-valuable assets for low prices, and when the market turns upside down and your purchase becomes demanded—this is when contrarian investing strategy pays off. It is also important to be able to see through economic bubbles: a trend that is quickly gaining momentum, and which many people build their incomes on. The thing is that bubbles tend to burst—unless it brings in money, almost no one thinks about this. As a contrarian investor, it is important for you to not rely on such bubbles, being able to notice and avoid them. Do not trust popular research published in newspapers—become a researcher, dig up all the information yourself, and have your own opinion. And finally, be prepared that even if your investment is prospective and potentially beneficial for everyone, it will take a much longer time for the market to notice it than if you were doing business in a more “mainstream” way.
Contrarian investing is a rather risky way of doing business, suitable mostly for experienced and skilled business professionals who have patience, self-assurance, and analytical wit. Betting on currently not-so-popular segments of the market, contrarian investors know that their time and effort will eventually pay off much more than if they were doing business in the regular way. Mostly depending on research and resources, contrarian investing implies going against trends and hype—but the outcomes of this are usually much more rewarding than following the direction everyone else does.
“What is Contrarian Investing Anyway?” MoneyWeek. N.p., 13 Jan. 2017. Web. 21 July 2017.
“What is Contrarian Investing?” Barclays. N.p., n.d. Web. 21 July 2017.
Chambers, Clem. “5 Rules of Contrarian Investing.” Forbes. Forbes Magazine, 29 May 2014. Web. 21 July 2017.
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