A guide to contrarian investing

It is an often-heard cliché that to beat the market you need to be a contrarian. But what exactly does this mean, as it implies that the market is, if not always wrong, wrong for a great deal of the time? How can that be?

Going head to head with the market every day on every security is surely a losing game. Continually buying the stocks that are down and selling those that are up will generally end you up in the poor house. To be successful a contrarian investor must be selective and patient, essentially picking their battles. And make no doubt about it, making profits in the share market can be an epic battle of emotions.

Here is an apt analogy that we have come across. Imagine that you are in a cinema when a fire starts, and you have two minutes to get out. The only sensible decision is to exit as quickly as possible. The contrarian investors that rush into that burning cinema do not beat the market, they are toasted. So clearly that type of contrarian activity is not a winning strategy. That strategy would work if the cinema was not on fire, but surely the market does not panic and stampede when there is no fire?

Wrong.