Contrarian Investing | Is Contrarian Investing Profitable? | ET Money

Contrarian investing is a strategy that is characterised by the purchase and sale of securities which are in contrast to the prevailing sentiment of the time

For instance we often come across popular pessimism about a stock or sector which can drive its price so low that it ends up overstating the risks and understating its prospects

The pharmaceutical sector now for many years the Nifty Pharma had been operating at an average price earning ratio of 44

Then starting April of 2019, reports started rolling in of lower growth in the US markets which was soon followed by news on regulatory issues, pricing pressures and delays in launch of some drugs

And this was more than enough to push down the stocks of most pharma companies and the PE ratio of the pharma Index dropped down to 28 by October of 2019. In fact until one day before the markets tanked in March of 2020 as a consequence of the coronavirus pandemic the Nifty Pharma PE ratio was just 20 against a long term average of 44

WHY CONTRARIANISM WORKS IN INVESTING?

For instance say, you are trying to buy a share at the lowest possible price. And that makes sense because lower the price, that larger are the gains .. but if we look at it a level down then one should realise that a lower price can only happen when other people are selling.

A second reason why contrarian investing works is on account of the poor forecasting record of those so called “experts” you know, equity analysts, stock gurus, the people we often see on business channels etc.
CONTRARIAN INVESTING STRATEGIES & EXAMPLES

1. NEW INVESTING AVENUES

The first contrarian investing strategy is a very obvious one and involves investing in something that others aren’t doing. For example when the economist John Maynard Keynes managed the King’s College endowment fund he advocated investing in domestic and international stocks. This was a stark departure as most university endowments of the 1920s and 30s had invested their funds almost exclusively in land and fixed income assets

2. VOLATILITY INDICES

A second commonly used set of contrarian indicators particularly around investor sentiment are the volatility indices or VIX as it is generally known. Now, a VIX by tracking the prices of financial options gives a numeric measure of how pessimistic or optimistic, the market actors are at a particular moment in time.

3. DIVIDEND STRATEGY

This strategy is about purchasing a certain number of stocks that have the highest relative dividend yield. So while the original strategy was layered over the Dow Jones Industrial Average and with 10 stocks .. if this is done on the Nifty 200, our present day “Dogs of the Nifty” would include stocks like BPCL, Indian Oil Corporation, Indus Towers, Hindustan Zinc, Petronet LNG and others each of whom presently offers a dividend yield of over 5%

4. IGNORED SECTORS

The next contrarian strategy is revolves around human behaviour in the sense that the mind cannot focus on too many things at the same time. In that context, the stock market is no different and at any given time we’ll see a few sectors taking the limelight while a few other sectors are left back in the pool of ignorance. For example and presently Internet aggregators seem out-of-favour with the sector in totality having lost 30% of its value over the last three months

5. IDENTIFYING POINTS OF MAXIMUM PESSIMISM

Yet another contrarian strategy that practitioners employ lends it’s genesis to Templeton’s point of maximum pessimism. For instance - the Russian stock exchange was closed for a few weeks on account of the Ukraine-Russia war. And just today morning, the Colombo Stock Exchange had to halt trading after their stock market had a sharp fall within seconds of its opening. So always remember this when investing pessimism is as much your friend as euphoria is your enemy

Chapters:
00:00 Introduction
03:43 Why Contrarianism work?
06:29 Strategies and Examples
11:46 Contra Mutual Funds

RESOURCES:
via @amazon

#ETMoney

👉 Follow us on:

[arpitkumar]

I have always lived with a contrarian life, playing to my outs and trying to get into nothing to lose situations, leveraging imbalances to create relative advantage and cheering for the underdog.

So this strategy really resonates with me and I think I might go with it.

[ringingtones]

Hello. I am a viewer from Sri Lanka who invests in Colombo Stock Exchange . As you said the market was fallen over 10% within minutes. But if as a contrarian investor does if we invested money at that falling moment today we could make tons of money with returns over 1000%. Each and ever sector have given returns over 50% within months. Thank you

[shainz]

This is not a channel but a university 🙏🙏🙏🙏🙏🙏…. Fabulous and wonderful

[sachin_]

Ah, good to know. I had heard about Contrarian investing but didn't knew about it. Thanks for sharing 👍🏻

[shreebalajisampath]

I've always been a strong believer in contrarian strategy.

[Oceansta]

Roughly speaking, what percentage of ones portfolio should be in Contra Funds?

[venstomon]

Interesting. One of my core holdings is Invesco India Contra Fund . Not sure if I have to increase allocations on par with some of the growth mutual funds that I hold..

[SwaroopNarasimhaK]

Very good info. As a Genius member, I would like to see Genius view on another strategy, Coffee can investing. As Genius portfolios focus is not much on this strategy, I am wondering what is it's take on this strategy.

[shankar]

So Analysts ratings are as good as a coin toss.

[followlearn]

Pls do a video on STRATA - real estate investment

[jimitshah]

1)How is NAV calculated in Contra or Dynamic Mutual funds where they pick and choose stocks? Is it bad to enter a contra mutual fund if it is not new as most of the investment they might have made in the past has gained value, so NAV will be high? Does it work that way? Bit confused

[jrk]

Sir, is this true that MF with higher
AUM tend to have lower return in future.

[adityakapoor]

Good video as usual but I was expecting more, perhaps a review of some contra funds but looks like focus is now more on selling Genius...

[soumyajit.singha]

How is contra fund different from arbitrage fund