Billionaire Boys Club Member Forum (BBCMF)

[mick]

excerpt/So what is contrarian investing and who is a contrarian investor?
http://www.wealthdaily.com/resources/contrarian-investing/61

The answers are probably much more broad than you'd think. Many investors incorporate contrarian plays into otherwise conventional portfolios and many contrarian plays are based on common sense, value investing principles.

The contrarian aspect of the term is derived from solely from perspective. Perhaps the best way to define a contrarian investor is someone that shuns market trends and hyped investments. While other investors are jumping into a hot stock and chasing after gains that have already come and gone, a contrarian investor sees it as a reason to avoid the stock altogether.

The underlying logic is pretty simple. If a lot of investors are going after shares of the company, it is going to quickly become overbought and share prices will no longer reflect the actual strength of a company. Inevitably, overbought companies that are all over the news will see their shares drop in value as the share price to earnings ration drops to a reasonable level.

For the investors following popular and “conventional” strategies who were chasing after gains they missed, this will inevitably result in a loss as a correction occurs and confusion on why the strategy worked for others and failed for them.

To avoid this boom-and-bust cycle that many investors find themselves in, a contrarian investor is looking for the undervalued -- but otherwise healthy -- underdog that everyone else abandoned to hop on 'the next big thing.'

This isn't a bearish move. In fact, most contrarians are quite bullish about the companies they choose to invest in. It is all about getting into a position before anyone else notices that it is a strong play and before everyone else hears that they should be buying up shares and driving up the price.

In this sense, there is no single method or set technique for contrarian investing, but there are some basic themes that are universal. It is all about how a stock is evaluated as a potential portfolio position.

It certainly isn't an all-or-nothing strategy either. It can easily be integrated as part of a portfolio that stresses growth, income or value investing or mostly index-based funds.

That will minimize the downside risk of price corrections and minimize the effect of large institutional investors milking small investors for profits because they can outmaneuver them in the market.

How To Be A Contrarian Investor

Like many investing strategies, contrarian plays require strong research while stressing impartiality and discipline.

Contrarian investing often best when an investor has thoroughly analyzed the fundamentals of the companies they invest in. There is no need to rush while you do your due diligence. After all, these are the kinds of companies virtually everyone else is ignoring.

As you research the company, you should be looking for a solid management team, innovative products, efficient processes, and good profit margins. Companies that can maintain these fundamentals can weather downturns and unpopularity with investors while they continue to run their business as usual.

You should also be wary of trusting reports from analysts. They are often overly optimistic. At the same time, companies often try to low-ball earnings to try to calm down overly enthusiastic analysts. If they can pull that off, they'll get some good press about “beating earnings expectations.”

Price to earnings (P/E) ratios should be considered but taken with a grain of salt. The figure has two variables that can easily change. Current share price is one and the quarterly earnings figures are the other.

If earnings are rising quickly over time but current earnings are relatively low, the ratio will be high. At the same time, if share prices are stable but the company's earnings are tanking from bad products or sales, the figure is about to skyrocket.