Contrarian investing is very much based on investor psychology and the way the majority of investors act and react to market and economic events.
Smart investors have trained themselves to behave in the opposite way to what their feelings may be dictating.
As the term implies, a contrarian investor is one who doesn’t follow the crowd and, in fact, invests contrary to the major thinking at particular times in market and investment cycles.
The majority of investors tend to get caught up in the good news of rising markets and favourable market conditions and invest when prices are high. When market conditions turn, investors start to get out of the market and sell. Other investors see what is happening and follow, and prices fall.
This type of market behaviour not only applies to share markets but also property markets. We are all familiar with scenarios where property values become overpriced and investors get burnt when markets correct due to a variety of factors. Smart investors buy when markets are not looking attractive to others.
No-one can accurately predict when a market has bottomed, and market commentators are never game enough to make such predictions. As the saying goes “no-one rings a bell when the market has bottomed”.
By the time investors wait for more certainty, the market generally will have already rallied and investors will have missed out on bargain-buying opportunities.
While investors may not feel comfortable in putting large amounts of their capital into depressed markets, those who choose to make small incremental additions to their investments when they believe the time is appropriate, are often rewarded.