Contrarian investments

Contrarian investment means investing in companies/sectors that are currently out of favour in the markets. The time period can range from few weeks to years together. So contrarian investing comes with the risk that the investment may not return a decent return for a long time, i.e years together. I view these periods as opportunities to invest.

Most of the times though, the opportunities may be fleeting. Many a times, before i could even decide on whether it’s safe to invest, the price would have risen so much, i would decide not to invest.

In the other extreme, the opportunities may last very long i.e both in terms of price level and time period. Many a times, the prices will keep falling even after multiple months. Investing more money after a 70% - 80% fall from the intial purchase price in a specific sector/company, when rest of the market is normally priced require a lot of conviction in the original idea. Here every additional investment will feel more mentally exhausting.

In such cases I’ve continued to invest until either i was left with no money to invest or the investment would’ve exceeded a good percentage of my total portfolio. Concentration risk is one that I’ve tried to avoid from the beginning of my investment journey as this is one of the two major lessons of The Intelligent Investor .

After being repeatedly hit by both the above extremes, I’ve started investing a smaller portion. Depending on the market condition it may range from 1/10th of planned investment or a portion of available cash. In such cases, many a times, I’ll be left with a much smaller portfolio than what i would’ve preferred otherwise.

In markets the term “catching a falling knife” is considered a wrong approach. It might be wrong for speculators following technical analysis. For someone who follows Benjamin Graham’s value investing principles, these are real opportunities to build a portfolio. These kind of investments have given me some of the best returns.

David Dreman has written a few books on this topic. I read a physical copy of his “Contrarian Investment Strategies: The Next Generation” somewhere in early 2020’s. In this book, the author very clearly explains with a lot of examples on why making contrarian investments is a winning strategy.