Why being a contrarian investor could boost your returns

Going against the investment ‘herd’ could be a shrewd move.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The stock market is generally in a period of either optimism or pessimism. That’s why the terms ‘bullish’ and ‘bearish’ are often used to describe market sentiment. Another way of doing so could be to describe investors as either fearful or greedy, since the dominant emotion of the two can lead to major share price gains or losses in a relatively short period of time.

Of course, all investors wish to buy ahead of a more bullish period of time for the stock market, and sell prior to a more bearish period. Doing so can be tough, but by being a contrarian investor it is possible to use changes in market sentiment to your advantage.

Going against the herd

Clearly, to buy at a low ebb for the stock market and sell at a high point requires an investor to go against the dominant emotion of the wider market. Share prices are rarely low without good reason. This could be because of a recession, industry challenges or internal problems which are hurting a company’s financial outlook.

In such a scenario, most investors will sell up and deem the risks to be too great given the potential rewards. However, contrarian investors would instead go against the investment herd and buy the company in question. Doing so can lead to a period of disappointment and paper losses, but in the long run it can lead to a relatively high total return.

It’s a similar story when selling shares. Market optimism may be high and it may seem as though the current Bull Run will never end. However, no asset price has ever risen in perpetuity, so selling when other investors are optimistic could allow an investor to lock-in profits at the most lucrative point in the investment cycle.

Investor mind-set

As highlighted, being a contrarian investor can be tough. It usually means an investor is wrong for at least a period of time, since it is tough to call the exact top and bottom of a market. This is where a long-term outlook can prove to be extremely helpful, since it can mean greater patience on the part of the investor. Furthermore, focusing on the history of the stock market shows that even when there are major problems facing it which seem insurmountable in the short run, in the long run major stock markets have always recovered to post higher highs.

Clearly, obtaining the right mind-set is easier said than done. Some investors will inevitably find it more straightforward than others to buy when other investors are selling and vice versa. However, by doing so it can be possible to find the most opportune moments to buy and sell shares, which could then lead to higher total returns in the long run. As such, being a contrarian investor may not always be fun or exciting, but it can be hugely profitable over a multi-year period.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Investing Articles

£3,000 in savings? Here’s how I’d use that to start earning a monthly passive income

Our writer digs into the details of how spending a few thousand pounds on dividend shares now could help him…

Read more »

Investing Articles

Here’s what dividend forecasts could do for the BP share price in the next three years

I can understand why the BP share price is low, as oil's increasingly seen as evil. But BP's a cash…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

This FTSE 100 Dividend Aristocrat is on sale now

Stephen Wright thinks Croda International’s impressive dividend record means it could be the best FTSE 100 stock to add to…

Read more »

Investing Articles

3 shares I’d buy for passive income if I was retiring early

Roland Head profiles three FTSE 350 dividend shares he’d like to buy for their passive income to support an early…

Read more »

Investing Articles

Here’s how many Aviva shares I’d need for £1,000 a year in passive income

Our writer has been buying shares of this FTSE 100 insurer, but how many would he need to aim for…

Read more »

Female Doctor In White Coat Having Meeting With Woman Patient In Office
Investing Articles

1 incredible growth stock I can’t find on the FTSE 100

The FTSE 100 offers us a lot of interesting investment opportunities, but there's not much in the way of traditional…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

With an £8K lump sum, I could create an annual second income worth £5,347

This Fool explains how a second income is achievable by using a lump sum, investing in stocks, and the magic…

Read more »

Investing Articles

Here’s what dividend forecasts could do for the BT share price in the next 3 years

With the BT share price down so low, the dividend looks very nice indeed. The company's debt is off-putting, though.…

Read more »