Contrarian Investing

Contrarian investors believe that markets often overreact. When pessimism is extreme, prices may fall below the true value of assets, creating buying opportunities. When optimism is extreme, prices may rise too far, creating risks.

For example, a contrarian might buy shares in an industry that has fallen sharply after bad news, believing the decline is overdone and that the businesses will recover. They might also sell or avoid popular shares that have risen dramatically and attracted widespread enthusiasm.

Contrarian investing overlaps with value investing, since unpopular assets often trade at low valuations. It draws on ideas from behavioral finance, such as herding and overreaction.

The approach requires patience and a willingness to stand apart from the crowd, since unpopular investments can stay unpopular, or fall further, for a long time. Something being out of favour does not make it a bargain; contrarians still need careful analysis to avoid businesses that are cheap for good reason.