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Why becoming a contrarian investor could be your ticket to financial independence

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If you want to actually beat the market and increase your chances of becoming financially free faster than most, you’ll need to do what the majority of people won’t. That could involve having a more contrarian portfolio, buying shares in smaller companies and/or taking positions in those businesses that, perhaps for a variety of reasons, are currently hated.

The last of these options is arguably the most difficult psychologically speaking, but it also has the potential to be very rewarding, as the following examples illustrate.

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Back from the dead

One contrarian opportunity that came about recently was funeral services provider, Dignity (LSE: DTY).  Back in January, its shares plummeted in value as investors fretted over rising competition and management’s decision to cut the prices of its simple funerals in response.

The jitters were understandable, but the 50% fall felt overdone, particularly as the market appeared to be ignoring the emotional aspect of transactions in the area in which Dignity operates.  

Last week’s trading update suggests my bullish call may have been right.

In addition to the death rate over Q1 being 8% (181,000) higher than over the same period in 2017, the number of simple funerals performed by the company represented a lower than expected percentage of the all those it was involved with. At £37.5m, earnings before interest and tax (EBIT) were also “significantly ahead” of management expectations.

Quite rightly, Dignity’s board isn’t getting carried away. It would be premature to say that the ‘worst’ is over, particularly as “meaningful conclusions” from its new trials are still some way away.  Nevertheless, a near 40% rise in the shares since January suggests investors now believe Dignity is ready to leave intensive care. 

Too much negativity

Another stock that was out of favour until recently was bookmarker William Hill (LSE: WMH). Towards the end of last year, I suggested that the market was too negative on the company.

Since its November lows, the stock has rallied some 34% following some encouraging updates on trading.

In February, the bookmarker revealed a 7% rise in group net revenue and 11% rise in adjusted operating profit. It also stated that its online and retail divisions in the UK were growing “at or above market growth rates“. CEO Philip Bowcock stated that the company had begun 2018 “in a stronger position” and that it would continue investing in its online offering while also looking to take advantage of increased regulation in the US going forward (pending a positive decision from the Supreme Court).  

With a final decision on the maximum stake for fixed odds betting terminals in the UK also expected very soon, things could get very interesting indeed. Anything higher than the £2 sought by campaigners and William Hill’s stock could soar.

Bottom Line

So long as you can be patient, a contrarian investing style can do wonders for your wealth. Make a habit of picking companies whose share prices are only temporarily depressed and financial independence need not remain a distant dream.

This is not to say, however, that every heavy faller recovers, hence the need for contrarians to select their targets carefully rather than adopting a scattergun approach. For every Dignity and William Hill, there are many Carillions, hence why a sober evaluation of a company’s financial position and prospects is so essential before putting your capital to work.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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