Reviewed by Jan 29, 2021| Updated on
Contrarian investing is a type of investment in which investors actively go against prevailing market patterns by selling when others buy, and buying when most investors sell. Contrarian investors believe that individuals who say the market is growing, only do so when they are fully invested and have no additional purchasing power. The market is at a peak at this stage. So when people predict a slowdown, they've already sold out, and at this point, the market can only go up.
Contrarian investing is, as the name implies, a strategy which involves going at a given time against the grain of investor sentiment. It is possible to apply the concepts behind contrary investment to individual stocks, the industry as a whole, or even entire markets.
A counter-investor comes onto the market when others feel pessimistic about it. He thinks the market or stock value is below its intrinsic value and therefore represents an incentive. Essentially, an excess of pessimism among other investors has driven the stock price below what it should be, and the opposing investor must buy that before the broader sentiment recovers, and the share prices recover.
Sometimes, contrary investors buy distressed stocks; then, sell them once the share price has recovered, and other investors also start targeting the business. Contrary investing is built around the idea that the herd instinct that can take control of the course of the market does not make for a good strategy for investment.
This feeling, however, can lead to a lack of gains if large bullish market sentiment proves to be true, leading to market gains even as opponents have already sold their positions. Likewise, if market sentiment remains bearish, an undervalued stock targeted by the contrarians as an investment opportunity can remain undervalued.