What Is Contrarian Investing? (2024)

Contrarians go against the grain: If you say up, they say down. Contrarian investing is choosing to put your money into assets that go against the grain of market sentiment. When the stock market is selling off, contrarian investors jump in and buy—or they sell when there’s a flurry of buying.

What Is Contrarian Investing?

The herd mentality nearly always prevails in financial markets. Most market participants share in the general consensus that the stock market is doing well and should keep racking up gains, or that the market is in trouble and will be lower next week than it is today.

Contrarian investing means holding a viewpoint on the market that is out of favor, and then doing the necessary research to determine if there’s an investment opportunity. Successful contrarian investors must be willing to spend a lot of time evaluating market conditions to build their case.

If the prevailing market sentiment is that the pace of economic growth will accelerate, for instance, spurring more market gains, a contrarian could decide to make investments predicated on the idea that the economy won’t accelerate, and that stock prices will decline.

The concept was summed up best by famed contrarian investor Warren Buffett when he said, “Be fearful when others are greedy, and greedy when others are fearful.”

It may take an investor weeks or months to fully develop a contrarian viewpoint, and even more time for their strategy to pay off. Contrarian investors must be comfortable with the risks and potential losses that come with waiting. By making investment decisions that align with a contrarian view—and doing so early—contrarians aim to make trades before the consensus view shifts in their favor.

How Does Contrarian Investing Work?

The starting point for contrarian investing is to thoroughly understand the consensus view. This can be for an individual stock, a broader stock market sector or the market as a whole. Then a contrarian investor pokes holes in the consensus, and develops an argument that underscores their contrarian view.

For example, if the consensus view is a “bull case” for the stock market predicated on accelerating economic growth, a contrarian investor might build a “bear case” for the market as a whole, or sectors within it.

A contrarian investor may also find themselves bullish when the prevailing sentiment is bearish. That’s particularly true with individual stocks or stock sectors that have fallen out of favor. Hedge funds, which pool money from investors, often seek out aggressive contrarian investment strategies, for instance.

Contrarian investors aren’t looking for short-term gains. The goal is to identify pockets of opportunities within the market where they believe that the consensus view is wrong, in the hope that their investment will pay off as other investors readjust their outlook.

As a result, contrarian investors must be comfortable with the short-term losses and the uncertainty that comes with waiting for their contrarian view to be proven right.

Contrarian Investing vs Other Investing Strategies

Contrarian investing is a form of active investing, since contrarians seek to outperform the market rather than keep pace with the market’s gains. Contrarian investing also aligns more closely with long-term investing than day trading, because contrarians often have a timeline that’s weeks, months or years long.

Contrarian investing may see the most overlap with value investing. Both approaches seek out opportunities that have been overlooked and mispriced by the majority of investors. Both are seeking stocks that are underpriced, or where the share price is below their estimate of a company’s intrinsic value..

Finally, contrarian investors may find themselves aligned with short sellers who bet on falling prices by “shorting” a stock—or profiting on a stock when its share price declines. Even so, contrarian investors typically have a longer timeline than short sellers, and are equally as focused on investment opportunities that require asset prices to rise.

Advantages of Contrarian Investing

Contrarian investing is appealing for two primary reasons. When it works, contrarian investors can identify opportunities where the herd mentality in the market is wrong, and potentially outperform other investors in the process.

By going against the grain, contrarian investors may be able to reap big gains, as long as they have the time and patience to wait out their prediction. For example, one popular contrarian strategy is to invest in stocks during the midst of a bear market, or when stock prices are falling.

Even if contrarians don’t correctly identify the exact bottom in the market, by buying when other investors are rushing to sell, contrarians can see their investment pay off once stock prices start going up again.

Finally, contrarians may find a great deal of personal satisfaction by being invested as such. Because this style of investing requires a lot of research and market expertise, investors may find it rewarding—beyond the financial gains—when their outlook proves to be correct.

Disadvantages of Contrarian Investing

Developing a contrarian viewpoint requires a lot of curiosity and independent thinking, along with the time necessary to research how individual stocks, broader stock sectors or even the market as a whole trades.

There’s a level of fortitude that’s required of contrarian investors to maintain an out-of-consensus viewpoint, particularly if investors must wait some time to see if their theory is correct. Contrarian investors must have both the time and money to wait, particularly because they could experience some short-term underperformance in pursuit of their contrarian strategy paying off.

There’s an opportunity cost of tying up money in a contrarian strategy that may take months to come to fruition, and investors must be comfortable with this type of risk.

Contrarian investing also isn’t as approachable for most investors as other investment strategies, given the time and research required to develop sound contrarian theories. The prospect of proving other investors wrong is tantalizing, but it’s difficult to correctly time the buying and selling that’s required of the contrarian strategy.

Famous Contrarian Investors

Warren Buffett is famous for being a value investor, but much of his approach to investing is also contrarian. Buffett has built his wealth by successfully finding pockets of opportunity within the stock market, and his stock picks are closely scrutinized for their validity and ultimate worth as investments.

Even so, Buffett has cautioned investors about falling into the trappings of any particular investment strategy: “Don’t get caught up with what other people are doing,” he has said. “Being a contrarian isn’t the key, but being a crowd follower isn’t either.”

One of the main characters in Michael Lewis’ book, The Big Short, has become a face for contrarian investing. Michael Burry, a hedge fund manager, was among a small group of investors who correctly predicted a bubble in the subprime housing market. As with Burry, other professional money managers and hedge fund managers have become famous for their contrarian bets, including Bill Ackman, George Soros, Ray Dalio, and Marc Faber.

Recent history also highlights a contrarian viewpoint that became the prevailing one. In early 2021, a group of stocks that had fallen out of favor with professional investors caught the attention of amateur traders on social media. So-called meme stocks including GameStop and AMC Entertainment quickly experienced huge gains.

While some traders profited off what began as a contrarian theory of sorts, the fundamentals (revenue and earnings) for these companies couldn’t ultimately support the highest prices these stocks experienced, and they later fell again.