The contrarian approach refers to going against the herd. It refers to buying when most investors have gone into panic selling, and selling during a bull run in the market. The contrarian approach operates on the foundation of investor psychology, temporary events in companies, economic cycles of businesses or information that alters the fortunes of a stock, at a particular instance.
How Does It Help?
Contrarian investing means going against popular consensus. Many people who have enjoyed massive success in the stock market are contrarian investors. Here are some of the approaches.
Buying When Everyone Else Is Selling
During a crash, this is quite common. Market crashes usually take down all stocks, even the stocks of companies that are financially sound. A contrarian investors monitors such stocks, and once the market crashes and there is panic selling, the contrarian investor will buy as much of the stock, as possible. Also, if you had the misfortune of getting caught up in the wrong stock investment(s), and have exhausted your financial resources or credit – you’d be well advised to go to http://www.removedebtfast.org/help to get your finances back in order.
Selling When Everyone Else Is Buying
An easy way to determine if a market is about to peak, is when investing in IPOs catches the fancy of investors, and there is talk about getting 100 percent returns from the stock market – in just a few months. During such phases, IPOs seem like the next big thing, but the truth is that it is an indication that the market has reached its peak – and is about to plunge.
When Should You Take The Contrarian Approach?
Adopting the contrarian approach requires an understanding of how the stock market behaves, with the use of diligence, a lot of patience and a bit of luck. This approach requires basing your judgment on cold hard numbers. For instance, during a general macro-economic event, the market will beat a company that delivers 30 percent returns over the past few years. This could be the appropriate time to buy such stocks. Similarly, a prolonged slowdown in a particular commodity could be a good bet, if you have an understanding of the commodity cycle.
It should also be noted that, in preparation for the volatility of the stock market, deep confidence in one’s own financial standing, is critical; so, one must take stock of the liquidity of their funds, as well as, the status of their credit; for those who feel their credit will be an obstacle to successful investing, they will find a wealth of information to rectify this, at http://www.removedebtfast.org/help/the-easy-way.
Key Things To Note If You Are An Investor
The first thing is that the contrarian approach does not mean that you automatically go blindly against the herd. It simply refers to not being swayed by the prevailing sentiment in the market, wherein investors start buying overpriced stocks or selling good ones. In some instances going against the crowd can be disastrous for you.
The second things is that, this approach requires a great deal of patience. The backbone of the contrarian approach is investing in underpriced stocks or stocks that have fallen out of favor with investors and waiting for their prices (patiently) to go up. While you may be lucky and they might go up in a matter of days, it could take several years for this to happen. There is no substitute for patience.
Also, be mindful that one who is skilled at using the contrarian technique, may resort to using borrowed money or money from other investors (a hedge fund), in hopes of racking up massive capital gains; investors of this type must, nonetheless, proceed with caution, as the contrarian approach is a long term method, thus increases the likelihood of running out of (borrowed) funds, before seeing any capital gains, at all.
There have been numerous instances where, attempts to sustain such levels of investment activity (over such long stretches of time), resulted in acquiring remarkable amounts of massive debt – making whatever capital gains acquired, inconsequential; if you find yourself at the beginning of this stage, certain finance websites can show you how to minimize debts, like United Recovery Collection . ..You may also want to consider re-adjusting your investment approach, altogether.
Finally, the contrarian approach is not an approach that you reject or adopt, as per your convenience. It is a long-term approach that you need to adopt as part of your investment arsenal, if you wish to adopt this investing philosophy. A huge number of investors that want to adopt this approach, go against the crowd and buy a particular stock, only to end up losing their patience, once it dips further in price. Always keep in mind that identifying (precisely) the turning points in the market, is impossible.
To sum up, the contrarian approach is one that can help you enjoy a great deal of success in the stock market or any other financial market you may desire to partake in. As you can plainly see, it is an approach that requires a good deal of patience, but is one that will help you enjoy massive success in the stock market!