The word Contrarian refers to an investment style that goes against prevailing market trends by buying assets that are performing poorly and then selling when they perform well. A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricings in securities markets. e.g., widespread pessimism about a stock can drive a price so low that it overestimates the company's risks, and underestimates its potential returning to profitability. Identifying and purchasing such distressed stocks, and selling them after the company recovers, can lead to above market average gains. Similarly, widespread optimism can also result in unjustifiably high valuations of a particular company or stock that will eventually lead to significant downfall, when these high expectations are not fulfilled. Therefore, avoiding investments in over-hyped investments reduces such risk.
Contrarians are sometimes thought of as perma-bears, i.e., market participants who are permanently biased to a bear market view. However, a contrarian does not necessarily have a negative view of the overall stock market, nor does he believe that it is always overvalued, or that the conventional wisdom is always wrong. Instead, 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 or misguided. Such buying opportunities are likely to be identified during market declines. For instance, the recent market crashes in March and September 2007 where investors sold in panic served as a good opportunity for contrarians to pick up fundamentally sound stocks.
Famous contrarian include Benjamin Graham and David Dreman. A classic example in Malaysia is the self-made billionaire and ex-stockbroker Chua Ma Yu's recent acquisition of Star Cruises, which is loss making over the years.
In reality, it is not easy to become a contrarian. It takes a lot of courage and patience, and often, one will be left alone. Investors (particularly retail) are often driven by greed and fear, and highly influenced by daily media such as newspaper and television. When a market crashes, most investors do not have the courage to buy shares because they fear that the shares that they purchase today may get even cheaper tomorrow. It's more so difficult given the scenario of Asian financial crisis in 1997. where the savvy investor may not be able to withstand the kind of market collapse that happened. However, for those who did, at or near market rock-bottom, theiy would have been laughing all the way to the bank by now! On the other hand, an investor, may regret selling their investments too soon in a bull market, and as a result of feeling uneasy over the decision to sell too soon, coupled with little sign of market correction, one starts to buy back stocks and eventually run into problems due to severe market downfall triggered by unforeseen events such as winding off of Yen-carry trades, inflation, US sub-prime property woes, etc.
