There are many different ways to invest. You can put your money into everything from established companies paying regular dividends to those growing rapidly.
You’ve also got global multinationals with multi-billion-dollar revenues and small companies that are little more than a gem of an idea and bags of ambition.
Then there is country exposure. For example, funds can provide access to developed regions, such as the United States, as well as the emerging markets.
However, there is a particular investment philosophy that requires nerves of steel, but which has the potential to deliver bumper returns: Being a contrarian investor.
Here we investigate what constitutes a contrarian philosophy, which investors are best suited to such a strategy, and the various pros and cons to consider.
What is a contrarian investor?
A contrarian does something different to everyone else. If the entire market turns its back on growth companies, for example, they’ll be the ones snapping up their shares.
The most famous contrarian investor is Warren Buffett. He suggested investors, “be fearful when others are greedy and greedy when others are fearful.”
Fund managers embracing a contrarian approach will use their skill and experience to uncover exciting stock and sector opportunities their rivals have overlooked.
Generally, they will be so convinced their research is correct that they’ll be willing to endure short-term periods of underperformance on the way to longer-term success.
The hope is they’re eventually proved right, the company in question delivers far better returns than the market expected, its stock price soars, and the fund outperforms others with similar mandates.
What do contrarians invest in?
This will depend on their fund’s objectives. Contrarian investors can be found operating across the marketplace, putting money to work in everything from US large caps to Japanese smaller companies.
They will usually make their move after sentiment has moved sharply against either a stock or sector and provided an attractively priced entry point.
For example, a company may find itself out of favour after announcing the departure of a senior executive or warning it’s likely to miss a particular performance target.
While many investors may decide to sell their shares in the business at this point and cut their losses, a contrarian confident of its longer-term prospects will look to take advantage.
They will either buy into this company – or increase existing holdings – when the share price has fallen to a certain level. They can then sell out of the position after it’s (hopefully) revalued.
Pros and cons
No investment provides a guaranteed route to riches. There are always positives and negatives to consider, and contrarian investing is no different.
The most obvious benefit of the approach is enjoying returns missed by others. Successful contrarian investors take calculated risks that they believe will pay off. When they do, it can be very lucrative. A number of wise investment calls will enhance the performance of the investment fund and, consequently, the returns enjoyed by the end investor.
Of course, there are also potential problems with a contrarian approach. The most obvious is the fact that no-one knows exactly what will happen. For example, the depressed stock price of the company in question may never recover as predicted by the contrarian. In some cases, it may end up falling even further.
It’s also worth remembering that contrarian investors can be wrong for long periods, even if their investment thesis eventually plays out as predicted. This may impact their returns in the meantime.
Find a contrarian
If being a contrarian appeals, then take a look at fund managers that are well-known for taking such approaches – and see if they’ve been successful previously. While past performance is no guarantee of future returns, it certainly makes sense to put your money with someone that boasts a track record of delivering.
Finding such individuals, however, will take a bit of research. Often the name of the fund they run will hint at a contrarian streak in their nature. For example, they may be at the helm of portfolios that have words such as ‘recovery’ or ‘special situations’ in their names.
Elite Rated examples include Ninety One UK Special Situations, Jupiter UK Special Situations and Schroder Recovery.
They also include the less obvious Invesco China Equity, Fidelity Special Values and TM Redwheel Global Equity Income.
Further evidence will be found within their investment objectives where they spell out in detail what they’re looking to achieve – and the route they’ll take.
Is a contrarian approach for you?
Being a contrarian is not for everyone. In particular, it’s not suitable for the faint of heart.
If you’re an investor that suffers cold sweats every time the FTSE 100 drops a few points, then a contrarian approach is not for you. It’ll be too emotionally draining.
Only investors that are comfortable with stock market volatility and patient enough to allow the contrarian manager’s prediction to reach fruition, should consider it.
Therefore, if you have some excess money and are happy to embrace a higher degree of risk in exchange for the possibility of enhanced returns, then it may fit the bill.
Remember, though, that you shouldn’t be risking all your money on contrarian approaches. The exposure to such positions needs to be part of a diversified investment strategy.
