The Motley Fool

Contrarian investing for beginners

Image source: Getty Images.

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.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

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.

A Top Share with Enormous Growth Potential

Savvy investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this ‘pure-play’ online business (yes, despite the pandemic!).

Not only does this company enjoy a dominant market-leading position…

But its capital-light, highly scalable business model has previously helped it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns … in fact, in 2019 it returned a whopping £150m+ to shareholders in dividends and buybacks!

And here’s the really exciting part…

While COVID-19 may have thrown the company a curveball, management have acted swiftly to ensure this business is as well placed as it can be to ride out the current period of uncertainty… in fact, our analyst believes it should come roaring back to life, just as soon as normal economic activity resumes.

That’s why we think now could be the perfect time for you to start building your own stake in this exceptional business – especially given the shares look to be trading on a fairly undemanding valuation for the year to March 2021.

Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Growth Share… free of charge!

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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.