23 pieces of timeless wisdom on contrarian investing – Stock and Ladder (2024)

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There are many who give advice, but few who offer guidance” Anonymous
When faced with the dark storm clouds, the seamen look up to the lighthouse for guiding them safely to the shores. Similarly, when faced with the dark clouds of doubt, fear and confusion while their contrarian investing ideas get played out, to whom can the ordinary investors look up to for guidance? – The Investing Masters!!!

Contrarian investing has great potential to leave a lucrative mark on your portfolio or it can also end up leaving you with a giant financial scar. This duality of whether it’s going to end up in a mark or a scar often leads an investor down the path of fear, anxiety and worry.
Last week I wrote an analogy on contrarian investing in an investing forum and had compared contrarian investing to a “knife”:

An analogy I can think of for contrarian investing is that of a “Knife”. In the hands of a skillful surgeon, a knife becomes a very useful tool to provide well-being / joy and in the hands of a toddler it can cause great harm / pain. Similarly, Contrarian investing when practiced by a skillful investor backed by solid facts can be a useful strategy for wealth creation. When practiced by (newbie) investors without backing of sound logic and reasoning, it may become a strategy for wealth destruction.

I was proudly discussing this analogy of mine with a friend and reveling in its beauty when he rightfully brought me back to earth asking “Your analogy is fine but what have the investing masters told on contrarian investing?”
I did tell a few things I knew but quickly realized it was not substantial enough. When I searched, I found a treasure trove of fine investing wisdom on contrarian investing from the investing masters.
My humble request, dear reader, please do not skim through the list but take a moment to pause and reflect on every single one of them. I am confident the time spent thinking will turn out to be a one fine piece of investment you have made.

Investing wisdom on contrarian investing

23 pieces of timeless wisdom on contrarian investing – Stock and Ladder (1)

David Dreman

The success of contrarian strategies requires you at times to go against gut reactions, the prevailing beliefs in the marketplace, and the experts you respect
It’s very hard to go against the crowd. Even if you’ve done it most of your life, it still jolts you
Favored stocks under perform the market, while out-of-favor companies outperform the market, but the reappraisal often happens slowly, even glacially

John Neff

It’s not always easy to do what’s not popular, but that’s where you make your money. Buy stocks that look bad to less careful investors and hang on until their real value is recognized
I’ve never bought a stock unless, in my view, it was on sale
Buy on the cannons and sell on the trumpets

Michael Steinhardt

The hardest thing over the years has been having the courage to go against the dominant wisdom of the time, to have a view that is at variance with the present consensus and bet that view. Courage and the ability to withstand pain are required
Time and again, in every market cycle I have witnessed, the extremes of emotion always appear, even among experienced investors. When the world wants to buy only [bonds], you can almost close your eyes and [buy] stocks
In order to win as a contrarian, you need the right timing and you have to put on a position in the appropriate size. If you do it too small, it’s not meaningful. If you do it too big, you can get wiped out if your timing is slightly off. The process requires courage, commitment and an understanding of your own psychology

Warren Buffet

A business or stock is not an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What’s required is thinking rather than polling
Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well
You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right
I will tell you how to become rich…Be fearful when others are greedy. Be greedy when others are fearful

Benjamin Graham

An intelligent investor gets satisfaction from the thought that his operations are exactly opposite to those of the crowd
Buy when most people, including experts, are pessimistic, and sell when they are actively optimistic
The best values today are often found in the stocks that were once hot and have since gone cold

John Templeton

To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit
Bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria. Thetime of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell
If you want to have a better performance than the crowd, you must do things differently from the crowd

Philip fisher

Be extra careful when buying into companies and industries that are the current darlings of the financial community

Whitney Tilson

To succeed as a contrarian you must recognize what the crowd believes, have concrete justification for why the majority is wrong, and have the patience and conviction to stick with what is, by definition, an unpopular bet

James Montier

Point 4 from “7 immutable laws of investing

Humans are prone to herd because it is always warmer and safer in the middle of the herd. Indeed, our brains are wired to make us social animals. We feel the pain of social exclusion in the same parts of the brain where we feel real physical pain. So being a contrarian is a little bit like having your arm broken on a regular basis

Mohnish Pabrai

Wall Street sometimes gets confused between risk and uncertainty, and you can profit handsomely from that confusion. The low-risk, high-uncertainty [situation] gives us our most sought after coin-toss odds. Heads, I win; tails, I don’t lose much

Final thoughts

Paraphrasing Buffet, it is clear that “Contrarian investing is simple but not easy”.
These pieces of timeless wisdom on contrarian investing certainly helped me in answering my friend. Did it also help you by providing answers for some of your questions?
It’s my belief that these pieces of wisdom will make it a little bit more easier for you to place winning contrarian bets confidently. If this also ends up being a lighthouse in guiding you safely to the shores of financial freedom then my joy will have no bounds.
I am eager to learn about other pieces of wisdom on contrarian investing that you feel is timeless. Please call it out in the comments.
(Post updated with wisdom from James Montier and Mohnish Pabrai)

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I'm deeply immersed in the world of contrarian investing, having honed my understanding through years of studying the strategies and insights of some of the most revered investing masters. In this realm, where financial decisions can either lead to prosperous gains or significant losses, the guidance of seasoned experts becomes indispensable.

The analogy I recently crafted, comparing contrarian investing to a "knife," reflects the dual nature of this strategy. It can either be a precise tool for wealth creation in the hands of a skillful investor or a source of financial pain in the hands of an inexperienced individual. This analogy, grounded in real-world dynamics, has resonated with many, prompting further exploration into the wisdom shared by investing masters on contrarian investing.

One prominent figure in this space is David Dreman, emphasizing the necessity of going against gut reactions, prevailing market beliefs, and respected experts for successful contrarian strategies. John Neff advocates for investing in stocks that appear unfavorable to less careful investors, holding onto them until their true value is recognized. Michael Steinhardt stresses the importance of courage and the ability to go against prevailing wisdom, highlighting the need for the right timing and position size in contrarian plays.

Warren Buffett, a beacon in the investing world, cautions against blindly following the crowd, asserting that intelligent investing requires thoughtful consideration rather than poll-driven decisions. Benjamin Graham echoes this sentiment, advising to buy when others are pessimistic and sell when they are optimistic. John Templeton underlines the courage needed to buy when others are selling and sell when others are buying, emphasizing the profitability of going against the crowd during market cycles.

Philip Fisher warns about the dangers of investing in current financial darlings, while Whitney Tilson emphasizes the importance of recognizing and justifying contrarian positions patiently. James Montier, in his "7 immutable laws of investing," delves into the psychological aspect, highlighting the challenge of being a contrarian in a society wired for conformity. Mohnish Pabrai sheds light on the confusion between risk and uncertainty on Wall Street, offering insights into profiting from such confusion.

In conclusion, the wisdom distilled from these investing masters forms a valuable guide for anyone navigating the complexities of contrarian investing. As a believer in the power of these timeless principles, I encourage you to reflect on each piece of advice and consider how it may inform your investment strategy. If contrarian investing is a journey through stormy seas, let the collective wisdom of these masters be your lighthouse, guiding you safely to the shores of financial freedom.

23 pieces of timeless wisdom on contrarian investing – Stock and Ladder (2024)
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