Skip to main content

How to be a contrarian investor like Warren Buffett

The great money-making investors are not afraid of making big calls against common wisdom - famously Warren Buffett turned a handsome profit from buying into Goldman Sachs at the height of the financial crisis and now he has left commentators scratching their heads by buying into local newspapers.

But while anyone can invest wildly against crowd wisdom, that won't make them a billionaire like Warren Buffett.

What does it take to be a successful contrarian investor? And if you think you're made of the right stuff, how do you go about finding promising investment opportunities?

Read our guide, and the rich rewards might become more than just a dream...

Stand out from the herd: Famous investors like Warren Buffett have not been scared to go against the grain, but how can you tell if you have what it takes to be a contrarian?

Personality test: Are you a contrarian investor?WARREN BUFFETT: WORLD'S GREATEST INVESTOR

The contrarian investor credo on which Warren Buffett has built a huge fortune is: 'Be fearful when others are greedy. Be greedy when others are fearful.'

And the octogenarian billionaire shows no sign of slowing down.

Only this year he has flummoxed fans by buying up a string of local newspapers, when popular wisdom has it that the print media industry is dying.

Still fancy investing like Buffett? There's a tool that allows you to do it. Read more here.

Common sense, discipline and guts: these are the qualities needed to be a successful contrarian investor.

That's the view of Ian Bright, senior economist and head of the eZonomics behavioural investing team at Dutch bank ING.

Common sense should tip you off if other investors are starting to lose their heads and it's time to take the opposite stance.

'There is an aspect of common sense where you can tell the crowd around you is going into some kind of mania or panic,' says Bright. 'They become irrational. Things that weren't connected become connected.'

This can lead to the usual differentiation between assets waning or disappearing - all will fall or rise together.

Bright says we can see this playing out right now in the eurozone crisis, which is causing investors to take a pessimistic view of all European assets whatever their individual strengths and weaknesses.

'There is very little differentiation between countries and companies that are likely to survive a shock to the European system,' he points out.

The need for discipline is obvious. It takes hard work - potentially many hours sifting figures - to succeed at any type of investing, let alone when you are searching out opportunities that go against prevailing market wisdom.

'You actually have to sit down and do a few sums,' warns Bright. And he circles back to his first point, adding: 'Being a contrarian just for the sake of it is not common sense.'

  More... INVESTING IDEAS: How to invest like Warren Buffett - and the tool that checks you are doing it right The tricks and traps of making money: How to adjust your investing behaviour to strike it rich

Beware the contrarian investing traps

What about guts? Bright quotes the most famous and successful contrarian investor of our time, Warren Buffett, who said: 'Be fearful when others are greedy. Be greedy when others are fearful.'

Fine words, but Bright cautions: 'It takes a lot of courage to stand against the view of the crowd.

So can investors 'learn' the virtues suited to being a good contrarian.

'I suspect you can but there is no guarantee that it's necessarily going to work,' says Bright. 'Being a contrarian investor doesn't mean you will be better than average.'

He says many would-be contrarians fall into two common behavioural traps - overtrading and overconfidence.

If you overtrade 'fees will eat you up'. And if you are overconfident it makes you unwilling to correct mistakes.

'You have to be prepared to accept you might be wrong,' says Bright. 'Approach these things with a healthy degree of humility.'

He issues a further warning to anyone who believes they have what it takes to be a contrarian investor: do the basics of financial planning first.

This means creating a personal budget, including a 'large emergency fund' worth three to six months of your take-home pay, and reviewing it at intervals.

Bright says it is most important to have a core set of savings in which you preserve funds before you have a go at more advanced forms of investing.

Pitfalls: Many would-be contrarians fall into two common behavioural traps - overtrading and overconfidence

Inspiration: How do you find contrarian investments?

Contrarian investing is a strategy followed by many finance professionals.

Even if you don't have the same time or know-how, being aware of what they are on the look-out for can help you spot your own opportunities.

Gavin Haynes, managing director of investment adviser Whitechurch Securities, offers a guide to some of the main areas of interest to contrarians.

Stock valuations

One of the 'screens' used by contrarian fund managers is stocks that have fallen by more than 50 per cent over a five-year period, says Haynes.

They then analyse the reasons for the drop, seeking a catalyst that could spark an eventual recovery.

But there might be no such catalyst, Haynes is quick to warn.

'Contrarian investing will not always be successful. Markets are efficient and stocks are correctly priced much of the time. If a stock is out of favour there might be good reason for that.

'The skill for a contrarian investor is to find a catalyst that will result in a turnaround.'

Unpopular markets

Markets and sectors that are out of favour are naturally a prime target for contrarians - and you don't have to look further than Europe for a good example at the moment.

The long-running eurozone debt crisis has created massive uncertainty and even fears of a full-scale financial collapse. Many investors unsurprisingly regard stocks and markets directly vulnerable to such a threat with deep suspicion.

But Haynes says: 'There are a number of globe-leading companies in Europe. A good contrarian stock picker, that is the kind of opportunity they would look for. You might see some good contrarian opportunities in Europe at the moment.'

Fund performance tables

Take a look at the 10 worst-performing funds instead of the 10 best-performing ones, suggests Haynes.

'Psychologically what people look for is a fund at the top of the table,' he says. 'A contrarian would look at the bottom 10.'

A poorly-performing fund manager might have an investing style and philosophy that is out of fashion at present but have strong recovery potential, explains Haynes. 'You have to look deeper and try to find a reason and see if it's due to a cyclical thing.'

FURTHER READING FOR THE WOULD-BE CONTRARIAN INVESTOR

Annual letters to Berkshire Hathaway shareholders by Warren Buffett

The Intelligent Investor by Benjamin Graham

Money by Eric Lonergan

* Recommendations by Ian Bright of ING

Investor mood

Investing against current market sentiment requires a strong stomach, says Haynes.

But those who bought in the midst of last summer's massive stock sell-off would have been rewarded even in the short term, he points out.

Haynes suggests that contrarians remember the investing adage that when news headlines scream 'billions wiped off stock markets' it is time to buy.

In fact, it might signal an 'inflection point' - an event that proves to be a turning point and is followed by dramatic change.

Do the research...

Haynes says investors must be prepared to do detailed research into company accounts before taking a contrarian risk.

If a company has experienced difficulties, it's very important to assess its debt levels.

'You need to be confident if you are looking at a company that it's financially strong enough. Will it be in existence in five years time?' says Haynes.

...Or find an expert to do it for you

If you want a contrarian fund manager to do the work for you, Haynes recommends:

Tom Dobell, M&G Recovery Total Expense Ratio*: 1.65 per cent. Minimum investment: £500.

Alastair Mundy, Investec UK Special Situations TER: 1.60 per cent. Minimum investment: £1,000.

Mark Wynne Jones, Investec Global Special Situations TER: 1.61 per cent. Minimum investment: £1,000.

* The Total Expense Ratio (TER) is a yardstick of the total costs of a fund.

Early contrarian investor? Prometheus defied the gods to offer humans the valuable business tool of fire... As punishment, Zeus chained him to a rock where an eagle pecked at his guts every day, yet Prometheus never surrendered




Popular posts from this blog

Study Abroad USA, College of Charleston, Popular Courses, Alumni

Thinking for Study Abroad USA. School of Charleston, the wonderful grounds is situated in the actual middle of a verifiable city - Charleston. Get snatched up by the wonderful and customary engineering, beautiful pathways, or look at the advanced steel and glass building which houses the School of Business. The grounds additionally gives students simple admittance to a few major tech organizations like Amazon's CreateSpace, Google, TwitPic, and so on. The school offers students nearby as well as off-grounds convenience going from completely outfitted home lobbies to memorable homes. It is prepared to offer different types of assistance and facilities like clubs, associations, sporting exercises, support administrations, etc. To put it plainly, the school grounds is rising with energy and there will never be a dull second for students at the College of Charleston. Concentrate on Abroad USA is improving and remunerating for your future. The energetic grounds likewise houses various

Best MBA Online Colleges in the USA

“Opportunities never open, instead we create them for us”. Beginning with this amazing saying, let’s unbox today’s knowledge. Love Business and marketing? Want to make a high-paid career in business administration? Well, if yes, then mate, we have got you something amazing to do!   We all imagine an effortless future with a cozy house and a laptop. Well, well! You can make this happen. Today, with this guide, we will be exploring some of the top-notch online MBA universities and institutes in the USA. Let’s get started! Why learn Online MBA from the USA? Access to More Options This online era has given a second chance to children who want to reflect on their careers while managing their hectic schedules. In this, the internet has played a very crucial in rejuvenating schools, institutes, and colleges to give the best education to students across the globe. Graduating with Less Debt Regular classes from high reputed institutes often charge heavy tuition fees. However onl

Sickening moment maskless 'Karen' COUGHS in the face of grocery store customer, then claims she doesn't have to wear a mask because she 'isn't sick'

A woman was captured on camera following a customer through a supermarket as she coughs on her after claiming she does not need a mask because she is not sick.  Video of the incident, which has garnered hundreds of thousands of views on Twitter alone, allegedly took place in a Su per Saver in Lincoln, Nebraska according to Twitter user @davenewworld_2. In it, an unidentified woman was captured dramatically coughing as she smiles saying 'Excuse me! I'm coming through' in the direction of the customer recording her. Scroll down for video An unidentified woman was captured dramatically coughing as she smiles saying 'Excuse me! I'm coming through' in the direction of a woman recording her A woman was captured on camera following a customer as she coughs on her in a supermarket without a mask on claiming she does not need one because she is not sick @chaiteabugz #karen #covid #karens #karensgonewild #karensalert #masks we were just wearing a mask at the store. ¿ o