Contrarian investment: buy when there is blood on the street

The worse the market, the greater the chance of profit. This seems to be the creed of reverse investment. Baron Rothschild was a British nobleman in the 18th century and a member of the Rothschild Banking family. He once said that “the time to buy is when there is blood on the street”. He should know. Rothschild made a fortune in the panic after the battle of Waterloo and Napoleon. But this is not all. The original offer is believed to be “Buy when there is blood on the street, Even if the blood is your own.

Key points

  • Contrarian investment is a strategy that runs counter to current market trends or sentiments.
  • The idea is that the market is affected by herding behavior that increases fear and greed, causing the market to regularly overprice and underprice.
  • “Fear when others are greedy, and be greedy when others are fearful,” said Warren Buffett, which sums up the philosophy of contrarianism.
  • Trading against the trend may be beneficial, but it is usually a risky strategy and may take a long time to reap the rewards.

Most people only want the winners in their portfolio, but as Warren Buffett warns: “You pay a very high price in the stock market to get a pleasant consensus.” In other words, if everyone All agree with your investment decision, then this may not be a good decision.

Against the crowd

As the name suggests, contrarian investors try to do the opposite of the crowd. They get excited when the stock price of an otherwise good company falls unexpectedly sharply. They go upstream and assume that the market is usually wrong when it is extremely low and extremely high. The greater the price volatility, the more misleading they think other markets will be.

Contrarian investors believe that those who say the market is going up will only do so if they are fully invested and have no further purchasing power. At this point, the market is at its peak and must fall. When people predict a downturn, they are already sold out, and the market can only rise at this time. For this reason, contrarian thinking is very suitable for judging whether a stock has really bottomed out.

Buy good things when bad

Contrarian investors have historically made the best investments in times of market turmoil. In the 1987 stock market crash (also known as “Black Monday”), the Dow fell 22% in one day

In the 1973-74 bear market, the market fell 45% in approximately 22 months. The attacks on September 11, 2001 also caused the market to fall sharply. The list is too numerous to enumerate, but in those times contrarian investors found their best investments.

The 1973-74 bear market gave Warren Buffett the opportunity to buy a stake in the Washington Post Company — an investment that subsequently increased the purchase price by more than 100 times — before dividends were included. At the time, Buffett stated that he was buying the company’s stock at a significant discount. It turned out that the company could “sell (Post’s) assets to any of the 10 buyers for no less than $400 million. One, this may be considerable.” More. “At the same time, the Washington Post Company had a market value of only 80 million U.S. dollars. In 2013, the company was sold to Amazon billionaire CEO and founder Jeff Bezos for 250 million U.S. dollars in cash.

After the terrorist attack on September 11, the world was grounded for a while. Suppose you have invested in Boeing (BA) at this time, which is one of the largest commercial aircraft manufacturers in the world. Boeing’s stock didn’t bottom out until about a year after September 11, but since then, its value has more than quadrupled in the next five years. Obviously, although September 11 deteriorated the market’s sentiment towards the aviation industry for a considerable period of time, those who conducted research and were willing to bet on Boeing’s survival received generous returns.

It was also during this period that Marty Whitman, the manager of the Third Avenue Value Fund, had previously purchased K-Mart bonds. and After filing for bankruptcy protection in 2002. He only paid about 20 cents in bonds. Although it looked like the company would close forever for a while, Whitman proved it when the company emerged from bankruptcy and his bonds were exchanged for new K-Mart stock. Prior to its acquisition by Sears (SHLD), in the years after the reorganization, the stock price rose sharply, and Whitman made considerable profits.

Sir John Templeton ran the Templeton Growth Fund from 1954 to 1992, when he sold it. In 1954, every 10,000 U.S. dollars invested in the fund’s Class A stocks will increase to 2 million U.S. dollars by 1992, and dividends will be reinvested, or the annualized rate of return is approximately 14.5%. Templeton pioneered international investment. He is also a serious contrarian investor, and according to his principles, he buys when the country and company reach the “most pessimistic view”.

As an example of this strategy, Templeton bought the shares of all European public companies at the beginning of World War II in 1939, including many that went bankrupt. He started it with borrowed money. Four years later, he sold the stock and made a huge profit.

Risks of contrarian investment

While the most famous contrarian investors bet large sums of money, go against the current and stand out, they also do some serious research to ensure that the crowd is really wrong. Therefore, when a stock plummets, this will not prompt the reverse investor to place an immediate buy order, but to find out what caused the stock price to fall and whether the price fall is reasonable.

Once the company recovers, figuring out which stocks that are in trouble can be bought and sold is the main game of reverse investors. This may result in securities returns much higher than usual. However, being too optimistic about hyped stocks may have the opposite effect.

Bottom line

Although these successful contrarian investors have their own strategies for valuing potential investments, they all have a common strategy-they let the market bring them deals instead of chasing them.


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