What is Contrarian Investing

The word Contararian Investing might have given you an idea of what this kind of investing this one is about. If you sell and buy in contrast to the widespread sentiment around the market, you are following contrarian strategy. Contararian Investors invest in contrary to the market direction. And it is a valid strategy.

Invest against the sentiment of the market

See a stock plummeting to record lows because of bad earnings? Might be the best time buy. When a stock drops, too much negative news around the stock can undervalue the stock and overstate the risk involved. Same thing goes for a stock on a high roll, it might be the best time sell because it might be overvalued or get overvalued because every one is buying it. If you think about it, this kind of technique is similar to value investing. Warren Buffet also believes in this strategy, who believes when shortsightedness of others drives the price down, it's the best time to buy.

But one should never buy or sell totally in contrary to the market. It's a change in mindset essentially.

When a regular investor sees a stock performing bad for long, they might think

I should stay away from this, it's a terrible stock

A contrarian investor would think

This stock has been falling for a while, this might have gone undervalue. Might be a good stock to buy

See? The difference is mindset. The regular investor might be right and the stock might go down further but one could easily see the logic in the contrarian and see that is it is also a valid strategy.