How To Become A Contrarian Investor | Exploring Markets

How To Become A Contrarian Investor

This question comes up so much. But just about everyone gets it wrong. So let's try to explain what it means to be a contrarian investor in 5 bullet points.

1. Develop an inherent skepticism

Start questioning everything. Including the things you read on the Internet like this post. You should be asking "can I even trust this website?" "How does this site know how to be a contrarian investor?" You need to start questioning and thinking analytically about why everything around you could be wrong or illogical.

2. You need to understand history including its bubbles and mania

This requires research and reading. To be a contrarian investor it's essential to have a firm understanding of history. Specifically as it applies to the stock market. Have you heard of the South Sea Trading Company? Do you know about the 1636 Tulip Bubble? If you are not familiar with these then it's time to begin reading books like The Extraordinary Popular Delusions and Madness of Crowds. Here's a chart that quickly highlights other perceived bubbles that can be researched and studied.

3. Saying something is a bubble does NOT make you a contrarian investor

By some estimates, the real bubble is in the use of the word bubble. There are far too many people out there who think just because they know about the Tulip Bubble, they now can see bubbles all around them. It's not that easy and it's incorrect to think that way. A contrarian investor can sense this and sense that the actual contrarian is the one who thinks there ISN'T a bubble.

4. You have to be able to spot the direction of the herd

There are a lot of fake contrarian investors out there. They think just because they are going against the herd with an investment makes them right and also contrarian. This is not true at all. At the end of the day a contrarian can spot the herd and decipher which direction they're headed. But then they need to figure out of if the herd is right or wrong. A contrarian will actually sometimes follow the herd because the herd is right and it's contrarian for a contrarian to follow the herd! See the paradox there? Contrarians have a deep understanding of this.

5. You have to be able to figure out when everyone else is wrong

If you made it this far you know you are skeptical of everything, you have an understanding of financial market history, you know what a bubble is, and you know how herds of investors can pile into a stock or asset. Now it's time to finally go contrarian and invest in something. But before you do that, you need to know why the other side is wrong. You don't need to know why you're right as much as you need to understand why they are wrong. There should be some sort of analytical proof or core understanding that you can prove. This is essential because if you are a contrarian investor, you need to be able to explain your position clearly and to anyone.