Showing posts with label contrarian investing. Show all posts
Showing posts with label contrarian investing. Show all posts

Sunday 1 January 2023

Value Investing and Contrarian Thinking

Value investing by its very nature is contrarian. 

Out-of-favor securities may be undervalued; popular securities almost never are. 

What the herd is buying is, by definition, in favor. 

Securities in favor have already been bid up in price on the basis of optimistic expectations and are unlikely to represent good value that has been overlooked. 


Where may value exist?

If value is not likely to exist in what the herd is buying, where may it exist? 

In what they are 

  • selling, 
  • unaware of, or 
  • ignoring. 

When the herd is selling a security, the market price may fall well beyond reason. 

Ignored, obscure, or newly created securities may similarly be or become undervalued. 


Contrarians are almost always initially wrong

Investors may find it difficult to act as contrarians for they can never be certain whether or when they will be proven correct. 

Since they are acting against the crowd, contrarians are almost always initially wrong and likely for a time to suffer paper losses. 

By contrast, members of the herd are nearly always right for a period. 

Not only are contrarians initially wrong, they may be wrong more often and for longer periods than others because market trends can continue long past any limits warranted by underlying value. 


When contrary opinion can be put to use.

Holding a contrary opinion is not always useful to investors, however. 

1.  When widely held opinions have no influence on the issue at hand, nothing is gained by swimming against the tide. 

  • It is always the consensus that the sun will rise tomorrow, but this view does not influence the outcome. 

2.  By contrast, when majority opinion does affect the outcome or the odds, contrary opinion can be put to use

  • When the herd rushes into home health-care stocks, bidding up prices and thereby lowering available returns, the majority has altered the risk/ reward ratio, allowing contrarians to bet against the crowd with the odds skewed in their favor. 
  • When investors in 1983 either ignored or panned the stock of Nabisco, causing it to trade at a discount to other food companies, the risk/reward ratio became more favorable, creating a buying opportunity for contrarians. 

Sunday 12 January 2020

Value Investing and Contrarian Thinking

Value investing by its very nature is contrarian. 

Out-of-favor securities may be undervalued; popular securities almost never are. 


What the herd is buying is, by definition, in favor.

  • Securities in favor have already been bid up in price on the basis of optimistic expectations and are unlikely to represent good value that has been overlooked. 

If value is not likely to exist in what the herd is buying, where may it exist?

  • In what they are selling, unaware of, or ignoring. 
  • When the herd is selling a security, the market price may fall well beyond reason. 
  • Ignored, obscure, or newly created securities may similarly be or become undervalued. 

Investors may find it difficult to act as contrarians for they can never be certain whether or when they will be proven correct. 

  • Since they are acting against the crowd, contrarians are almost always initially wrong and likely for a time to suffer paper losses. 
  • By contrast, members of the herd are nearly always right for a period. 
  • Not only are contrarians initially wrong, they may be wrong more often and for longer periods than others because market trends can continue long past any limits warranted by underlying value. 

Holding a contrary opinion is not always useful to investors, however.

  • When widely held opinions have no influence on the issue at hand, nothing is gained by swimming against the tide. 
  • It is always the consensus that the sun will rise tomorrow, but this view does not influence the outcome. 

By contrast, when majority opinion does affect the outcome or the odds, contrary opinion can be put to use. 
  • When the herd rushes into home health-care stocks, bidding up prices and thereby lowering available returns, the majority has altered the risk/reward ratio, allowing contrarians to bet against the crowd with the odds skewed in their favor. 
  • When investors in 1983 either ignored or panned the stock of Nabisco, causing it to trade at a discount to other food companies, the risk/reward ratio became more favorable, creating a buying opportunity for contrarians.

Tuesday 21 February 2012

Value Investing and Contrarian Thinking

Value investing by its very nature is contrarian.

  • Out-of-favor securities may be undervalued, popular securities almost never are.  
  • What the herd is buying is, by definition, in favor.  
  • Securities in favor have already been bid up in price on the basis of optimistic expectations and are unlikely to represent good value that has been overlooked.


If value is not likely to exist in what the herd is buying, where may it exist?  In what they are selling, unaware of, or ignoring.  

  • When the herd is selling a security, the market price may fall well beyond reason.  
  • Ignored, obscure, or newly created securities may similarly be or become undervalued.  
Investors may find it difficult to act as contrarians for they can never be certain whether or when they will be proven correct.

  • Since they are acting against the crowd, contrarians are almost always initially wrong and likely to suffer paper losses.  By contrast, members of the herd are nearly always right for a period.  
  • Not only are contrarians initially wrong, they may be wrong more often and for longer periods than others because market trends can continue long past any limits warranted by underlying value.



Holding a contrary opinion is not always useful to investors, however.

  • When widely held opinions have no influence on the issue at hand, nothing is gained by swimming against the tide.  It is always the consensus that the sun will rise tomorrow, but this view does not influence the outcome. 
  • By contrast, when majority opinion does affect the outcome or the odds , contrary opinion can be put to use. 
  • When the herd rushes into home health-care stocks, bidding up prices and thereby lowering available returns, the majority has altered the risk/reward ratio, allowing contrarians to bet against the crowd with the odds skewed in their favor. 
  • When investors in 1983 either ignored or panned the stock of Nabisco, causing it to trade at a discount to other food companies, the risk/reward ratio became more favorable, creating a buying opportunity for contrarians.

Ref:  Margin of Safety by Seth Klarman

Monday 12 April 2010

Here is a technique to learn more about your buying and selling decision making.

You may separate all the months the market went up from the months the market went down.  Do this from the year 2005 to now, which includes the 2008 severe bear market.

From your CDS account statements, you can find out whether you were a net buyer or a net seller during these various months.

  • If you were a net buyer during the months the stock market declined, you are more likely to be a contrarian.  
  • But if you were a net buyer when the stock market did well, you may have a herd mentality.

Thursday 4 March 2010

Basic Steps on How to Find Profitable High Performance Stocks

Basic Steps on How to Find Profitable High Performance Stocks
March 2, 2010

Stock picking can be a extremely perplexing procedure and investors have very different ideas on how to achieve the desired outcome. Nevertheless, it may be very wise to follow some basic steps which will assist you to minimize the risk of the investments that you end up choosing.

This article will outline some basic steps for picking those high performance stocks that we all aspire to find.

You must have firmly placed in your mind exactly the time frame and the general strategy of the stock. This step is very important because it will influence as to the type of stocks you buy.

We shall presume that you have decided to be a long term investor. Therefore you would then be wanting to locate stocks that possess sustainable,good competitive advantages along with stable or increasing growth for the future.

The way to locating these High Performance stocks is by considering the historical performance of each stock over the past couple of years.Once you have found a likely stock you would then need to do a simple business S.W.O.T.analysis on the company. Swot basically means: Strength-Weakness-Opportunity-Threat.)

If you have decided instead to become a short term investor, it might be a good idea to a stick to one of the following couple of strategies:

1. Momentum Trading.

This useful strategy is to keep an eye open for stocks that have increased in both price and volume over the recent days trading or two. You would most likely find that momentum fluctuates rapidly to begin with and tends to lessen off as traders lose interest. Mind you nothing is guaranteed particularly in today’s market place

Usually most technical analysis will support this trading strategy. But my advice on this strategy is to look only for stocks that have exhibited stable and consistent rises in their share price. We are presuming that the idea is that when the stocks are not so volatile, we can merely ride the up-trend until the trend breaks.

2. Contrarian Strategy.

This second useful strategy is to be on the look for over-reactions that occur in the stock market from time to time. Past research has shown that the stock market is not always efficient as we are led to believe. This basically means that share prices do not always accurately reflect the true value of the stocks. This can be used very much to our advantage.

Take for example when a company has just recently announced bad news,like a predicted downturn in future profit.This is exactly is what is happening here and now. All you have to do is follow the daily stock market news to see this occurring.

Trades who trade with their emotions become disillusioned, become fearful, then panic and sell. As so often happens the share price often drops below the stocks actual fair value.

But before you decide whether to purchase the stock which has over-reacted to a bad news announcement, you should always take into consideration the possibility of recovery from the impact of the bad news.

For example, if the stock price had dropped by 20% after the company had just lost a legal case, but no permanent damage to the either the business’s reputation or the product had occurred, you can then be realistically confident that the market over-reacted. And given time the share price would no doubt rise again to its former level thereby rewarding you with a comfortable profit.

It would be prudent on using this strategy to find a list of stocks that have suffered a recent drop in share prices You could then analyze the potentiality of a reversal occurring by utilizing the well known technical indicator of candlestick analysis).

If the charts did confirm candlestick reversal patterns in the stocks in question, It would then be advisable to look through the recent news to analyze the exact causes of the recent price drops to ascertain that the over-sold opportunities actually existence.

Always do researches that will give you a choice of stocks that fits into to your own personal investment time frames and strategies. It is pointless trading in something you are not happy with or unsure of.

Once you have compiled a list of stocks to possibly purchase in the future, you would then need to diversify them in such a way that gives you the greatest reward/risk ratio. One way of achieving this is to employ a Markowitz analysis for your portfolio. This analysis will give you the exact proportions of money you should then apportion to each stock.

Hopefully these basic steps will get you started in your continuous quest to consistently make good profits in the stock market. Plus they will also broaden your knowledge about how the financial markets perform and react. Ultimately it will provide you with a sense of confidence that will enable you to make better trading decisions and therefore greater profits.

I wish happy profitable trading.

Author: Chris Strudwick
Source: ezinearticles.com
http://sellingstock.getherb.com/tag/stock-picking/

Tuesday 2 March 2010

Buy the Unloved, 2010 Style


It pays to go against the grain.
If chasing hot performers hasn't gotten you very far, consider doing the opposite.


Categories with the greatest inflows tend to underperform and those with the greatest outflows tend to outperform. Net flows tend to be driven by past returns, so, in effect, they are telling you what areas have gotten relatively overpriced and underpriced. If the market and fund investors were perfectly efficient and logical, flows and prices would only adjust so that everything had a similar potential risk/reward profile.


However, markets and fund investors generally overdo things in both directions, as the markets of the past two years illustrate vividly.


http://news.morningstar.com/articlenet/article.aspx?id=327599

Thursday 28 January 2010

****3 Steps To Profitable Stock Picking

3 Steps To Profitable Stock Picking

Stock picking is a very complicated process and investors have different approaches. However, it is wise to follow general steps to minimize the risk of the investments. This article will outline these basic steps for picking high performance stocks.

Step 1. Decide on the time frame and the general strategy of the investment. This step is very important because it will dictate the type of stocks you buy.

Suppose you decide to be a long term investor, you would want to find stocks that have sustainable competitive advantages along with stable growth. The key for finding these stocks is by looking at the historical performance of each stock over the past decades and do a simple business S.W.O.T. (Strength-weakness-opportunity-threat) analysis on the company.

If you decide to be a short term investor, you would like to adhere to one of the following strategies:

a. Momentum Trading. This strategy is to look for stocks that increase in both price and volume over the recent past. Most technical analyses support this trading strategy. My advice on this strategy is to look for stocks that have demonstrated stable and smooth rises in their prices. The idea is that when the stocks are not volatile, you can simply ride the up-trend until the trend breaks.

b. Contrarian Strategy. This strategy is to look for over-reactions in the stock market. Researches show that stock market is not always efficient, which means prices do not always accurately represent the values of the stocks. When a company announces a bad news, people panic and price often drops below the stock's fair value. To decide whether a stock over-reacted to a news, you should look at the possibility of recovery from the impact of the bad news. For example, if the stock drops 20% after the company loses a legal case that has no permanent damage to the business's brand and product, you can be confident that the market over-reacted. My advice on this strategy is to find a list of stocks that have recent drops in prices, analyze the potential for a reversal (through candlestick analysis). If the stocks demonstrate candlestick reversal patterns, I will go through the recent news to analyze the causes of the recent price drops to determine the existence of over-sold opportunities.

Step 2. Conduct researches that give you a selection of stocks that is consistent to your investment time frame and strategy. There are numerous stock screeners on the web that can help you find stocks according to your needs.

Step 3. Once you have a list of stocks to buy, you would need to diversify them in a way that gives the greatest reward/risk ratio. One way to do this is conduct a Markowitz analysis for your portfolio. The analysis will give you the proportions of money you should allocate to each stock. This step is crucial because diversification is one of the free-lunches in the investment world.

These three steps should get you started in your quest to consistently make money in the stock market. They will deepen your knowledge about the financial markets, and would provide a of confidence that helps you to make better trading decisions.

http://tradingindicator.blogspot.com/2010/01/3-steps-to-profitable-stock-picking.html

Comment:  There are many ways to make money.  Investing for the long term is profitable for many investors.  Some of those who employ other strategies can also be profitable too.

Thursday 14 January 2010

Contrarian Investment

Tuesday, September 26, 2006
Quick Comment: Contrarian Investment
I came across an article on contrarian investment recently and thought it is a nice article to share. According to Investopedia, the contrarian approach is an investment style that goes against prevailing market trends by buying assets that are performing poorly and selling when they perform well. A contrarian investor believes that the people who say the market is going up do so only when they are fully invested and have no further purchasing power. At this point the market is at a peak. On the other hand, when people predict a downturn, they have already sold out, at which point the market can only go up. Contrarian investing also emphasizes out-of-favor securities with low P/E ratios.

According to the article,
· It is a long-term strategy.
· It is not about timing the market, it is about value. For instance, "If your neighbour offers you his $500,000 house for $250,000 you don't wait for it to be offered at $200,000".
· One of the biggest errors is selling too early.
· You have to be prepared to look dumb for significant periods of time sometimes.
· Never expect to buy a stock right at the bottom.
· Staying out of companies that lose you money will save more than being in the ones that make you money. Preservation of capital and management of risk are paramount.
· Emotion is a contrarian's friend. When the market is going down the average man is looking at all the negatives and forgets the positive; that's when the opportunities arise.

The companies that contrarians look for are those that:
· Have solid brands.
· Have good cash flows.
· May be suffering a temporary economic setback.
· Would benefit from recapitalisation.
· Need management change.
· Would be capable of being changed.
· Opportunities seem to be where the market isn't, in sectors out of favour.
· Booms like the tech boom and the resources boom are good for contrarian investors because they take people away from value areas and make investors give up on long-term proven methods of investment and value assessment. They present opportunities that would never have been there otherwise.
· The contrarian is looking for market overreaction and the opportunity that overreaction presents.
· Don't be a mindless contrarian. Being contrarian is not about buying a share when it has fallen 10 per cent in a day just because everyone else is selling it. Only one in 20 major falls is an opportunity.
· Being contrarian means doing hard work to identify a situation the market hasn't while a stock is still at a price below what you calculate it to be worth.
· Contrarian investment does not rely on timing markets. You have to take a long-term view.

Sounds very much like TANJONG doesnt it? It has strong cash flow and is out of favour for fear of the negative effects of the PPA negotiations. However, the government has made it clear that it should be a win-win situation. Even if it ends up losing out a bit due to the new PPAs, downside would be rather limited since the bad news have already been priced in. Long term wise, it is still a very solid company.

Disclaimer: This report is brought to you by Investssmart, an unlicensed investment adviser. Please exercise your own judgment or seek professional advice from your remisiers. By law, they are the experts. I am not responsible for your investment decisions.

http://investssmart.blogspot.com/2006_09_01_archive.html

Friday 23 October 2009

The stock market requires an endless supply of losers

Perhaps the most forceful statement on the need to act in the contrary mode appears Confessions of a Wall Street Insider by the self-named C.C. Hazard:

"The stock market is built on a necessary foundation of error.  You make money on the market mainly by living off the errors of other players.  You become a predator, in fact, a carnivore, a beast of prey.  Others must die that you must live... The stock market requires an endless supply of losers."

By refusing to act like and with the crowd in either its manic or panic phases, an investor immensely raises his or her chance of not being part of that pool of losers. 

"Never follow the crowd!"

Leaning against that powerful tide

The crowd can be correct during much of a long trend, but always overstays and proves itself wrong at turning points.  When the feeling of bullish rightness becomes universal and powerful, a top is immediately at hand. 

Being successful in investing or trading means leaning against that powerful tide, which then creates psychological, financial and social stresses and strains not everyone can handle. 

If by nature an investor is passive, a follower, he may lack sufficient courage to do what is required for investing or trading success.  But if one can stick to contrarian principles despite probable early suboptimization of profits, he acquires a bucketful of cash near the top (plus some interest) for use later when the panic phase arrives. 

The key to success is to do what is not easy.

The key to success is to do what is not easy. What seems very easy will probably prove a mistake. Almost invariably when a buy looks compelling and overwhelmingly obvious, the investor actually is getting in too late.

The best bargains are purchased when the investor has to struggle and debate, afraid even to tell his broker about an idea under consideration.

When he loves the stock because it has treated him so well and wants to stay on board longer to maintain that highly comfortable association, he has overstayed the market.

"We buy (on) wars, earthquakes, coups, assassinations and devaluations. We sell on peace, free-trade agreements and all that other good stuff."

Buying and selling that way is how to succeed, but it always feels like facing into a 100-mph head wind at the time.

Saturday 5 September 2009

Invest like the masters: David Dreman

Invest like the masters: David Dreman

We've plumbed the minds of four great stock pickers to find your smartest investments.
Warren Buffett David Dreman Peter Lynch James O'Shaughnessy

David Dreman

This expatriate Canadian wrote the book — literally — on contrarian investing. His key finding? You can achieve great results by choosing cheap stocks that the market hates.

After graduating from the University of Manitoba in the 1950s David Dreman got his start as an analyst at his father's Winnipeg-based commodities trading firm. But Wall Street beckoned and he soon moved stateside where he has run a money management firm in Jersey City, N.J., for decades.

Dreman is perhaps best known as an author. His Contrarian Investment Strategies: The Next Generation deserves a spot on every investor's bookshelf. But he's no slouch when it comes to putting his book learning to the test and beating the market. His firm's large-cap value composite has bested the S&P 500 index by an average of 3.9 percentage points annually over the last 10 years, before fees. His small-cap value composite beat the Russell 2000 by 6.6 percentage points over the same period.

Dreman looks for stocks with low price-to-earnings ratios (P/E). These stocks are typically out of favor with investors for one reason or another. But often that's because investors have overreacted to bad news. As a group, low P/E stocks have a tendency to bounce back and perform well. In fact, Dreman calculates that U.S. stocks with the lowest 20% of P/E ratios provided average annual returns of 16.8% from 1920 to 2004, beating the market by four percentage points.

You might think that people would look at those figures and be lining up to buy low P/E stocks. The reality, though, is that investing in these firms requires courage. A good example is Dreman's investment in Altria, the cigarette company formerly known as Philip Morris. Altria has been a phenomenal performer over the long term, but it's been pummeled in recent years by tobacco-related litigation. You have to be confident in your judgment to buy a stock like Altria in the face of such overwhelming uncertainty.

Dreman's focus is on the U.S. market, but we decided to apply his methods closer to home and look for large Canadian stocks that he might like. We started with companies that earned at least $250 million from continuing operations over the last year. We then focused on stocks with the lowest positive P/E ratios. Dreman also looks for financial stability, so we required each stock to have less debt than shareholder equity as well as some revenue growth over the last three years. These criteria produced the list of 10 stocks shown in Dreman's value list. In addition to each stock's P/E and debt-to-equity ratio, we also show its dividend yield. After all, it's nice to be paid to wait for better times.

We think that low-P/E stocks will continue to earn more than their higher P/E brethren over the long haul— but such a happy result is not going to happen every year. You only have to go back to the Internet bubble to spot a period when Dreman's stocks trailed. On the other hand, low-P/E stocks usually shine during market downturns. So if you have a gloomy view of what lies ahead, you might find these stocks very much to your taste.

Dreman's value list


CompanyIndustry
Price P/E Debt/Equity Dividend Yield

EnCanaOil and gas
$52.56 6.1 0.42 0.89%
IPSCOSteel
$96.55 6.6 0.18 0.84%
E-L FinancialInsurance
$600.00 6.9 0.00 0.08%
Teck ComincoMining
$71.31 7.4 0.45 2.85%
Gerdau AmeristeelSteel
$10.31 7.7 0.34 0.90%
ING CanadaInsurance
$55.14 9.3 0.05 1.83%
Empire CompanyFood stores
$40.98 9.7 0.47 1.50%
CP RailwayTransportation
$55.23 10.6 0.68 1.38%
TD BankBanks
$66.80 10.8 0.56 2.91%
Talisman EnergyOil and gas
$18.57 11.1 0.74 0.80%


Source: globeinvestor.com, Sept. 28, 2006

http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20061128_104112_4584