Contrarian and Value Investing

Contrarian and Value Investing

Du bist alles was Ich brauch… Du bist die Große Liebe – Fler

Contrarian investing refers to investing contrary to what most other investors are doing. As per the name, contrarians buy stocks at distressed prices when all seems to indicate that the stocks are an unlikely win. In theory, after a while such stock would go up in price and value and thus the contrarian investor would make a profit. Remarkable contrarian investors include Warren Buffet, one of the richest billionaires in the world. Warren Buffet has been quoted as saying that the only way to get ahead in finance in America was to believe the world was flat (paraphrased).

Value investing is similar to contrarian investing, and at times the two have been compared to the point of showing no clear distinction. Again value investing relies on buying and owning shares of companies which are going down in the market. Contrarian investing has a lot to do with behavioural finance. Behavioural finance is a field of finance involving input from other social sciences, such as psychology, sociology and political science. Psychologically speaking, going against the herd is rather a rarity, although contrarian investors are often very successful.

Fire Place. Photo by Elena

The Gambler’s Fallacy is another paradigm involved with behavioural finance. According to this theorem, many people lose a lot of money at the slot machines in the casinos. For example, they sit at the same machine for hours, delusion ally believing that the machine is about to win since it has not reached the jackpot in a while. Such misunderstandings of reality have to do with poor understanding of probability theory. Indeed, the machines are programmed in such a way that the chances are the same of hitting the jackpot regardless of how long the machine has delivered.