Part 1

How Does Contrarian Investing Work?

“Whenever you find yourself on the side of the majority, it is time to pause and reflect.”-Mark Twain

People crave simple answers to complex questions. Unfortunately, there are few things simple when analyzing markets. The second, third, and fourth-order thinking required to beat markets is counterintuitive and incredibly difficult. We live in a harsh world, and we crave short-cuts to beat markets. Sometimes people get lucky and outperform the market, only to lag it dramatically a few months later. Fundamental analysis is one way market participants try to anchor themselves.

Not only does fundamental analysis provide a look into the intrinsic value of a particular security, but it also grounds investors in a process that can help them fight their own bias and emotional decision-making. Markets are by no means accessible, and they have never been. The first recorded book on markets and stocks is entitled, Confusion of Confusions. Since their inception, people have realized that successfully navigating markets is complicated. Your first thought or reaction may be the exact opposite of what you should do. Remember, there’s nothing average about outperforming markets, so if you come to play with average thinking and effort, you’ll probably buy high and sell low like those market participants driven by herd behavior.

How Does Contrarian Investing Work?
Source: New York Life Investments, Visual Capitalist

Incredibly though, for all the exertions of investors who try to beat the market and time tops and bottoms, the easiest way to benefit from markets is to do nothing. If you have the time to let your equities accrue benefits, you can confidently use downturns to lower your cost basis. One thing that most successful individual investors have is time. Quality stocks will reward you over time. History is never a guarantor of future results, but it can be a powerful indicator.

Although fundamental analysis is a crucial pillar of equity research, it must also be paired with an understanding of your competition: other investors. We’ll walk you through why it’s important to pay attention to not only the asset in question but the people trading it.

The confounding nature of markets should not surprise or deter you. It’s a natural and recurring property that you should consider. Alpha itself is usually reserved for those in the minority who invest in the right areas before the majority has the idea. Hence the above introductory quote from the good Mr. Twain.  Those who crave simple narratives and the easy answer will usually be the ones who buy high and sell low. Those who understand the centrality of being ahead of the crowd, not with it or behind it, typically achieve the alpha that hard work and out-of-the-box thinking might produce.

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