Qwoter Investment Advice
Custom Search
RSS Feed 

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z #

Contrarian Investing




A strategy involving making decisions contrary to the prevalent opinion, due to an observation that in the market, the majority is wrong more often than right.


Additional Comments:

A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricings in securities markets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company's risks, and understates its prospects for returning to profitability. Identifying and purchasing such distressed stocks, and selling them after the company recovers, can lead to above-average gains. Conversely, widespread optimism can result in unjustifiably high valuations that will eventually lead to drops, when those high expectations don't pan out. Avoiding investments in over-hyped investments reduces the risk of such drops. These general principles can apply whether the investment in question is an individual stock, an industry sector, or an entire market or any other asset class.

Some contrarians have a permanent bear market view, while the majority of investors bet on the market going up. However, a contrarian does not necessarily have a negative view of the overall stock market, nor does he have to believe that it is always overvalued, or that the conventional wisdom is always wrong. Rather, a contrarian seeks opportunities to buy or sell specific investments when the majority of investors appear to be doing the opposite, to the point where that investment has become mispriced. While more "buy" candidates are likely to be identified during market declines (and vice versa), these opportunities can occur during periods when the overall market is generally rising or falling.

Related Terms:

Mutual Funds
Mutual funds are the most common type of pooled investment. Funds "slice and dice" many types of ...

Fundamental Analysis
A method of predicting the behavior of a company's stocks by looking at fundamental information about ...

Investor
A person whose principal concern in the purchase of a security is the minimizing of long-term ...





«  View the Stock Market Dictionary  »

 




Search