Contrarian investing for beginners

Going against popular opinion can be a solid investment strategy. Here is what to consider when contrarian investing.

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.

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.

In the past few months I have noticed what a contrarian person I am. Whenever the press is reporting something as fact, or my friends all hold an opinion, I look for the other side. I look for what they are not seeing or saying. I look for why they hold those views.

When thinking about this, I realised this attitude comes from my investing. I have spent more than a decade looking for the other side of a stock’s story. Going against the majority opinion. Thinking I am right when others are wrong.

Indeed I have made some of my best investments doing just this. Here is how you can do the same.

Contrarian investing

To be clear, contrarian investing is when one goes against the majority opinion. Whenever you buy or sell a share, you are by nature having a different opinion to the person on the other side of the trade. If you are buying it for some reason, another person is selling it for another reason.

But contrarian investing is more than this. It is seeing a share price tank and knowing it is now a bargain rather than a loser. It is hearing nothing but bad news about a company but knowing it is still fundamentally strong. Its timing the point when everyone else will realise these things.

Of course, contrarian investing is not always the best choice. Sometimes the market is right. Sometimes the bad news is the most important news. But very often, it is a good start to your analysis.

Opportunity guidelines

The opportunity arises for contrarian investors because the fundamentals do not always drive a share price. Nor is there always perfect information for everyone. Most of the time, it is in fact expectations dictating short- and medium-term share price movements. These expectations can be wrong.

So then, some guidelines to contrarian investing.

First, look for sharp price movements. Most shares, most of the time, will not move more than a few percentage points a day. If they are, why?

News-driven price movements can often be the best opportunities. Panic selling after some short-term event is a tell-tale sign of an amateur investor. Some problems are fundamentally trouble for a company. Many are not. As Warren Buffett said, be “fearful when others are greedy, and greedy when others are fearful”.

Consider if the story is fundamentally going to hurt a company’s future, and for how long. Even large events such as low oil prices and Covid-19 may be opportunities. Are we all going to be locked down forever? Will the fall in profits this quarter continue into next?

Be careful, however, as the old adage is true: “the market can stay irrational longer than you can stay liquid”. Contrarian investing is not just about knowing everyone else is wrong, but also about timing the point when everyone else will realise it.

Looking for a slow down in price declines can help here, as can an increase in more positive news stories.

Unfortunately there is no hard and fast guarantee to contrarian investing. But holding the attitude will be most beneficial. Next time you see a share price falling, ask yourself whether it is the right move.

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.

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.

More on Investing Articles

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »

Investing Articles

£12K in savings? Here’s how I could turn that into £13K annual passive income

This Fool explains how investing a lump sum can help her build a passive income stream to enjoy in her…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s why Rolls-Royce shares are now set to fly over the £4 mark

Once again, Rolls-Royce shares are crushing the FTSE 100. Should I add to my holding of this stock at the…

Read more »

Investing Articles

1 under the radar FTSE 100 AI stock investors should consider buying

Our writer explains why this FTSE 100 pick could be a shrewd investment with its established experience of using AI…

Read more »

Investing Articles

Does the beaten-down Diageo share price make it a no-brainer buy?

Harvey Jones spent years waiting for the Diageo share price to look like good value, before finally buying it in…

Read more »