A contrarian investor is one who believes in profits over popular opinion. Contrarians think that this is a good time to buy, because, a stock falling in price becomes more attractive. By purchasing the stock of companies that are out of favor, the contrarian has an opportunity to realize profit when these companies regain popularity.
Typically, this process involves less initial risk, since purchase prices usually are at the low end of their valuation cycles.
When others Are Selling: Contrarians BUY!
When others Are Buying: Contrarians SELL!
Contrarian investors are inclined to buck conventional trends, NOT follow the standard perceptions of the stock market, and think the majority of investors out there are usually wrong.
A contrarian investor believes that certain crowd behavior among investors can lead to exploitable mis-pricings in securities markets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company’s risks, and understates its prospects for returning to profitability. Identifying and purchasing such distressed stocks, and selling them after the company recovers, can lead to above-average gains.
Contrarian investing is related to value investing in that the contrarian is also looking for mispriced investments and buying those that appear to be undervalued by the market. Some well-known value investors such as John Neff have questioned whether there is such a thing as a “contrarian”, seeing it as essentially synonymous with value investing.
One possible distinction is that a value stock, in finance theory, can be identified by financial metrics such as the book value or P/E ratio.
A contrarian investor may look at those metrics, but is also interested in measures of “sentiment” regarding the stock among other investors, such as sell-side analyst coverage and earnings forecasts, trading volume, and media commentary about the company and its business prospects.
Ten of the Greatest Contrarian Investors of Our Time
JIM ROGERS, one of the most successful investors of our lifetimes, in his twenties, with $600 in his pocket, “retired” at age 37 with more money than anyone could possibly spend. Jim Rogers co-founded the global investment partnership, The Quantum Fund, in the 1970s which made a 4200% return over ten years. Jim is the author of four books:
- A Bull in China (2007)
- Hot Commodities (2005)
- Adventure Capitalist (2003)
- Investment Biker (1994)
MARC FABER, Switzerland born and educated with PhD in Economics from the University of Zurich in hand at age 24, concentrates on Asian market niches with tremendous upsides like:
- In 1987 he warned his clients to cash out before Black Monday hit Wall Street
- In 1990 he predicted the bursting of the Japanese bubble
- In 1993 he predicted the downfall of U.S. gaming stocks and foresaw the Asia Pacific Crisis of 1997-98.
His motto is “Follow the course opposite to custom and you will almost always be right.”
SIR JOHN TEMPLETON, the young farm boy from Tennessee who, in 1939, went into his boss’s office and begged for a $10,000 loan and invested in every penny stock trading on a major exchange for $1 or less, 100 stocks in all, bought ‘em just as stocks were most hated watching those 100 stocks lead the U.S. out of the Great Depression. Templeton’s trade got him a junk pile of some 104 companies, 34 of which were bankrupt, for a total investment of roughly $10,400. Four years later he sold these stocks for more than $40,000!
Templeton became a billionaire as a true pioneer of globally diversified mutual funds, including the Templeton World Fund, which was formed in 1978. His flagship Templeton Growth Fund posted a 13.8% annualized average return from 1954 to 2004, well ahead of the Standard & Poor’s 11.1%.
SAM ZELL, with a net worth of about $1.8 billion, is known as the father of Real Estate Investment Trusts (REITS) who began buying real estate in down markets in the 1960s and, with his partners, speculated with precision accuracy for the next four decades with the mantra of: “Stay alive till ’95.”
Zell is also co-founder and Chairman of Equity International, a private investment firm that focuses on real estate-related companies outside of the U.S. In addition, Zell maintains substantial interests in, and is the Chairman of, a number of public companies listed on the New York Stock Exchange, including:
- Equity Residential (EQR), the largest apartment REIT
- Equity LifeStyle Properties (ELS), a real estate investment trust that owns and operates manufactured home communities
- Covanta Holding Corp. (CVA), an international leader in converting waste to energy
- Anixter (AXE), a value-add provider of integrated networking and cabling solutions that support business information and network infrastructure requirements.
EDUARDO ELSZTAIN was an unknown young man from Argentina who walked into the New York City offices of George Soros and sweet-talked him out of $10 million and turned the $10 million into a $500 million Argentine real estate portfolio. Investors who got onboard with him and Soros in their Dolphin Fund would have turned $100,000 into $1.9 million in a decade.
The strong recovery in the Argentine economy after 2002 then fostered growth into the mortgage lending sector, with the purchase of 28% of the formerly state owned Banco Hipotecario, and among its shopping centers, which as the source of half of IRSA’s revenues, boosted the firm’s income; in 2008, it developed Dot Buenos Aires, a 190,000m² (2 million ft²) shopping center and the largest building of its kind in Argentina
GEORGE SOROS is a Hungarian-born contrarian investor-philosopher who created the Quantum Fund with Jim Rogers which went on to return about 3,999%, compounded, over the next 30 years.
George Soros gained international notoriety when, in September of 1992, he risked $10 billion on a single currency speculation when he shorted the British pound. He turned out to be right, and in a single day the trade generated a profit of $1 billion – ultimately, it was reported that his profit on the transaction almost reached $2 billion.
As a result, he is famously known as the “the man who broke the Bank of England.”
Soros is also famous for running the Quantum Fund, which generated an average annual return of more than 30% while he was at the helm. Along with the famous pound trade, Soros was also cited by some as the “trigger” behind the Asian financial crisis in 1997, as he had a large bet against the Thai baht.
He is also widely known for his political activism and philanthropic efforts.
WAREEN BUFFETT is a famous contrarian, who believes that best time to invest in a stock is when shortsightedness of the market has beaten down the price. Referred to as the “Sage” or “Oracle” of Omaha, Warren Buffett is widely viewed as one of the most successful investors in history.
Following the principles set out by Benjamin Graham, he has amassed a personal multibillion dollar fortune mainly through investing in stocks and buying companies through Berkshire Hathaway.
Shareholders in Berkshire Hathaway who invested $10,000 in the company in 1965 are above the $50 million mark today. Now in his 70s, Buffett has yet to write a single book, but among investment professionals and the investing public, there is no more respected voice.
Widely regarded as one of the most successful investors in the world, Warren Buffett is often introduced as “legendary investor” as he is still the primary shareholder, chairman and CEO of Berkshire Hathaway.
DAVID DREMAN, a money manager often associated with contrarian investing. David Dreman’s name is synonymous with contrarian value investing strategies. His first book, “Contrarian Investment Strategy: The Psychology of Stock Market Success” (1980) is an investment classic. He has authored numerous scholarly investment articles in the Journal of Investing, Financial Analysts’ Journal and The Journal of Financial Behavior.
Dreman has also written the highly respected “The Contrarian” column in Forbes magazine for some 22 years.
JOHN NEFF, who managed the Vanguard Windsor fund for many years, is also considered a contrarian, though he has described himself as a value investor and questioned the distinction. John Neff’s average annual total return from Vanguard’s Windsor Fund during his 31-year tenure (1964-1995) as portfolio manager was 13.7%, against a similar return from the S&P 500 Index of 10.6%. He showed a great consistency in topping the market’s return by beating the broad market index 22 times during his tenure and was regularly in the top percent of money managers.
He was considered the “professional’s professional,” because many fund managers entrusted their money to him with the belief that it would be in safe hands.
MARK RIPPLE, a money manager often described as a contrarian, has authored a book, Handicapping the Wall Street Way, covering the topic in detail. After graduating from Hudson Valley Community College as a President’s List Student, Ripple commenced to further his studies at Rensselaer Polythechnic Institute until he was recruited as New York State’s youngest investment banker, at age 21, by Thomas James Associates of Rochester, New York. He spent one short year at the fledgling firm and was drafted by Merrill Lynch.
Ripple continues to invest for a very select group of clients with his British-Canadian partner, PVR Investment Holdings.
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