Contrarian Investing: A Guide To This Nonconformist Investment Strategy

It’s unconventional, brave and psychologically challenging. When everyone else is busy jumping on the bandwagon, contrarian investors are looking the other direction. Here’s what contrarian investing is all about.

There are many different investment strategies one can choose to follow. As no two investors are the same, your choice of investment strategy would depend on your investment goals, risk appetite, time horizon and personal preference.

One popular strategy is contrarian investing. Here’s what you need to know about this investment strategy and how you can execute it. 

What is contrarian investing

Contrarian investing is an investment strategy that goes in the opposite direction of the market trend.

To describe this investment strategy in a sentence, it would be: Buy when everyone’s selling, and sell when everyone’s buying.

Not a new investment concept, this strategy is largely related to one of Warren Buffet’s famous quotes, which is to “be fearful when others are greedy and greedy when others are fearful”. 

Just like how investors might opt for value investing to uncover hidden gems, or growth investing for multibagger gains, contrarian investing goes against the current market trend with the aim to reap higher returns. 

What can you use the contrarian investment strategy for? 

Contrarian investing isn’t limited to investing in stocks. As an investment strategy, you can apply to investing in individual stocks, asset classes, industries or the entire market in general. 

Here are some examples of how this might play out: 

• Individual stocks: If investors are keen on investing in Singapore bank stocks now that the 60% dividend cap has been lifted, and if you’re invested in the bank stocks, following this strategy would mean that you go against the grain and sell these stocks. 

• Asset classes: If everyone is shifting their cash out of gold, for example, then you would pick up some of that precious metal. Similarly, if every other friend is feeling bullish and going into cryptocurrency, you would, on the contrary, reduce your cryptocurrency exposure. 

• Industries: Industries such as the electric vehicle (EV) industry goes through periods of ups and downs. When the market sentiment is positive towards the growth of EV stocks, a contrarian investor would choose not to invest, but rather wait for the period when prices are falling and the hype around the industry is low. 

• Entire market: In the midst of March 2020, the general market sentiment was fearful, as many were unsure of how COVID-19 would play out. A contrarian investor at the time would have blocked out the external noise and instead chosen to pump their money into the markets while others were pulling out of investments in order to shore up their savings. 

Why be a contrarian investor

Contrarian investing has the potential for high, rewarding returns. 

For example, if you had invested during March 2020, you’d be sitting on incredible gains because that was the most significant dip in recent history.

Let’s take a look at the share price of a bank like DBS, for example. In February to March 2020, the share price fell from S$25 to less than S$18. If you bucked the trend at that point in time, putting your cash in DBS when everyone else was pulling out, you’d be sitting on gains of more than 60% today. 

In a more extreme example, when the share price of Crocs plunged from US$37 to US$10, if you had caught that falling knife and held it till today, you’d be enjoying more than 1300% returns, as Crocs is now trading upwards of US$140. 

Besides the potential for monetary returns, you also don’t have to conform to what everyone else is doing. 

How to execute contrarian investing

To effectively be a contrarian investor, you cannot follow the herd. Hence, this strategy takes a lot of guts, mental fortitude and emotional detachment in order to go against the flow.

For example, if all your friends are talking about investing in the different crypto coins, taking a contrarian approach requires you to ignore all the noise, peer pressure and not give in to ‘FOMO’. Similarly, when everyone else is sceptical, critical and has turned their backs on crypto, that’s precisely when you’re going in as a contrarian investor.

To invest as a contrarian, beyond looking at what the charts are saying, you must also have a good grasp of the market sentiments, what people are saying and where the money is going. This could even mean taking note of the positive (or negative) news headline angles and general mood of social media chatter. 

As with all forms of investment, you’d still need to protect your portfolio by managing the level of risk you’re taking on. This means diversifying your portfolio and making sure you’re not biting off more than you can chew. 

If you’re looking to invest in stocks, you can get started with a brokerage account by comparing the best ones on SingSaver. 

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