A contrarian is a person that has a willingness to embrace an opposing view to that of the majority opinion. Being critical of the mainstream news and judging facts independently is essential for getting ahead of the crowd.
Contrarians look for investments that are forming positive trends but that are out of favor with the public. They buy out of favor investments cheaply and sell them at high prices when they have become popular. They look for positive changes in distressed sectors and businesses. Industries that have gone through a lengthy bear market will have a negative association with the public and it takes a while for public opinion to change its attitude towards the industry as things improve.
Having opposing views contrarians are sometimes seen as out of touch with reality. Contrarians are criticized and marginalized for their views at the beginning of a new trend which may lead to discomfort. Contrarians that called the housing bubble before it burst in 2005 and 2006 were ridiculed by news anchors and other investors. However, as the housing bubble burst and the public attitude shifted the same people were later embraced for their foresight and wisdom. Being a contrarian can be difficult especially early on with a new trend. Contrarians must learn to accept the discomfort of having opposing views and even embrace it with the knowledge that things are about to change.
A common perception of the public is that the reality of the immediate past will indefinitely continue into the future. This attitude is reinforced by investors self-serving bias and echoed by other investors and the media. This complacency is reinforced during long periods of stability when the perceptions of a problem which persists for a long time without serious consequences stops being a seen as a problem. However, contrarians have the attitude that each day that passes without out serious consequences brings us one day closer to the day of reckoning. And the longer the consequences are delayed the more serious they are likely to be.
Contrarians recognizing the universal fallibility of the consensus and develop a healthy skepticism of the conventional wisdom. A healthy skepticism helps to avoid intimidation by the seemingly authorities on the subject.
To adapt a contrarian mindset, listen to the popular press with an ear for panic and greed and watch who is getting in and out of the market. At bottoms prices are depressed and people that has been in the industry for a very long time either get out or diversify. Words like, dead, doom, and disaster are used. To identify tops and bottoms the public consensus can be used as a reverse barometer.
For example, in 1979 business weak printed equities are dead on their cover page. This was the prevailing attitude among the public after a 15 year long bear market in stocks. Shortly after a great bull market was ignited and lasted for 20 years until 2000 with blowup of the .com bubble.
At market tops people that have never been in the industry before starts pouring in. At tops you will hear jubilance and cheers. Ever increasing stock prices and excessively optimistic expectation becomes the new norm at tops.
Tops and bottoms in the market are creatures of extremes. They raise above all rational expectations hang there and then fall further than common sense suggest. The smart investor does not consider himself to be a genius but watch television, read the news and train himself to analyze information and public opinion. A smart investor learns to buy fear and panic and sell greed and hysteria.
It does not take some mystical skills or a PhD in economics to be a good investor. All that is needed is some independent thinking and common sense. Look at the facts alone and not others opinion. It helps to study history. Markets rise and fall in repeatable fashion driven my mob psychology. Mark Twain got it right History doesn't repeat itself, but it does rhyme.
Warren Buffett We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
Rick Rule You are either a contrarian or a victim
Jim Rogers Get inside information from the president and you will probably lose half your money. If you get it from the chairman of the board, you will lose all of your money.
Ben Graham you are not right because people agree with you. You are right because your facts are right and your reasoning is right. Stick with your reasoning and dont be led astray by Wall Street fashions and illusions