Contrarian Investing: Should You Use This Investing Strategy in 2022?

You can’t say you’ve never heard of a contrarian view if you’ve never heard or read Warren Buffett’s famous quote: “Be afraid when others are greedy and greedy when the others are afraid.

Contrarian investing is just that – it means investing against the crowd. But it’s a hard road to walk. As humans we tend to want to move with the crowd. So if you’re like Buffett and picking up a bunch of ho-hum companies from the 1990s instead of buying tech bubble-related companies, it might sound too boring for words. But as Buffett has proven, going against the grain can pay off big time.

If you see yourself as the type who goes his own way (you’ve always worn pants in the summer and shorts in the winter), you might have the makeup to be a great contrarian investor.

Let’s get a bit more into the definition and some contrarian investing tips so you know if this might be the way to go as you ring in the new year.

What is contrarian investing?

Contrarian investors use a lot of market research to their advantage and the biggest goal is to move your capital from overvalued positions to undervalued ones. When you buy shares at a discount, you make money once the larger crowd takes notice and everyone says, “We should have invested in this company ten years ago!”

(Contrary investors would have already recognized the company as excellent and would have been ahead of the game.) However, you still need to do your research, because if you invest in bad companies to begin with, of course, you will not be make money.

Here’s an example of how it works: Let’s say the majority of investors, seeing the Omnicron variant take over, sell all of their hotel-related stocks. A contrarian investor is buying those stocks instead, believing consumer demand will surge as soon as advanced COVID vaccines and boosters hit the market. A contrarian investor might also choose to short overvalued stocks.

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Contrarian investors go contrarian in almost every way possible. So how do you do it? Let’s review some tips for using contrarian investing as a strategy.

Tip 1: Start with a great analysis.

Avoid watching the news. If something great has happened with a particular company and you hear about it on the news, you’re already too late. The news media are always a day behind and a dollar (or in many cases, thousands of dollars) short. You have to apply your own analysis to find out more about the companies, regardless of what is happening around the world.

In the end, it doesn’t matter how promising an industry looks – if you can’t choose a good company, you won’t make money. You need to know the fundamentals of big business, and that’s where value investing comes in. (You can’t become a good contrarian investor without knowing value investing – just ask Buffett.)

Learn how to calculate Debt Ratio (D/E), Earnings Per Share (EPS), Price to Book (P/BV), Price to Earnings (P/E), Growth of P/ E (PEG) ratio, to name a few.

Tip 2: Understand an industry inside out.

Going against the grain in an entire industry or entire markets can be worth it if you have the inside scoop.

To become a contrarian investor, consider becoming a comprehensive industry expert. You can act on what other investors don’t know. For example, let’s say you’ve worked in grocery stores all your life. You know that a specific technology will start arriving in grocery stores – a new type of device that scans products more efficiently and hasn’t reached the mainstream. You can be a contrarian investor by investing early on. When others don’t know what you know, it can create great opportunities.

Tip 3: Be patient.

You need to take a long view as a contrarian investor as you wait for the rest of the world to “catch up” to what you already know is great business. The rest of the world tends to react to corporate news. For example, when a company has poor earnings reports, stock prices drop, even though the company may be a healthy company with brand loyalty and excellent management. You will recognize the inherent strength of the business and ignore those small flaws. As long as you implement your excellent analysis, you will know that over time the business will pull through.

To help out, take a look at the companies you’re interested in and look at the dividends. Do they pay dividends? A dividend is a sum of money paid, usually quarterly, by a company to shareholders from its profits or monetary reserve. If you invest in a company that pays dividends, you will reap the benefits while waiting for everyone to notice that the stock is a good buy and subsequently becomes overvalued.

If you’re right, your predicted outcome will take forever to reveal itself – maybe even longer than you think. Your waiting game can go on for a long time.

Be greedy when others are afraid

This is perhaps the most famous cornerstone of contrarian investing: be greedy when others are scared. When has following the herd benefited you – in life and in investment? Best to go your own way.

Developing a thorough understanding of contrarian investing can do wonders for your long-term portfolio. Unfortunately, contrarian investing can be a lonely road, as others may not understand or appreciate the methods you have adopted. Friends, family and colleagues may simply not share your investment strategy or see the risks and returns as you see them. At worst, they may laugh at you — “Why would you invest in this company?”

If you can digest all the variables and have a huge hunch that you’re right, why not take it? A healthy dose of skepticism is the bread and butter of contrarians.

Ready to adopt this investment strategy in 2022? Good for you, but do your research.

7 growth stocks to buy as the market crashes

In times of volatility, it can be difficult for even experienced investors to stay the course. Yet over time, the shares have steadily increased in value. And growth stocks tend to be some of the biggest gains. Growth stocks are companies that analysts believe will grow at a rate significantly above the market average.

These stocks are also characterized by companies that reinvest a significant portion of their profits in their activities in order to accelerate their growth. This contrasts with value stocks which make returning some of its profits to shareholders a priority. This usually happens in the form of a dividend. A common misconception of growth stocks is that they have a high correlation to the market. It is true that when the market goes up, these stocks tend to outperform. However, when the market goes down, these stocks sometimes perform better.

So why should you consider buying growth stocks now? The reason is as follows. In many cases, the underlying fundamentals of the business are still positive, but the sentiment has changed. And that means it’s a good time to buy those stocks on sale.

Check out “7 Growth Stocks to Buy as the Market Tumbles”.

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