Going against the crowd typically triggers fear in people immediately. Why? Because everyone else is going with “A”, which makes them fear that they might be wrong in going with an alternative option “B”. They additionally may fear being embarrassed or appearing foolish if they go ahead with choice “B” and it turns out to be wrong.

“In investing, what is comfortable is rarely profitable,”  these great words by Robert Arnott, author, investor and founder of Research Affiliates, sums it all up about equity investments. As investors it is very comforting to be with the majority of the market as being wrong is more painful when you are alone and that’s the reason herd mentality is widely prevalent in equity investing.

We’re hard-wired to herd. In a new place, most people tend to choose a busy restaurant over an empty restaurant. While some may be rationally concluding that the busier restaurant probably has better food (which may or may not be true) many are just basing their decision on the choice of others. There is a very likely scenario that a person who visits the less crowded restaurant experiences a faster service and better quality of food. These people in investing world are known “Contrarians”.

Not against but different from the mentality crowds

Contrarians investors are not those who buy companies which is sold by everyone and sell those which are bought by everyone. It may be the outcome, but not the thought. Contrarians investors take non-consensus positions and wait for rest of the market to recognize the true potential of the investments.

The crowd is not wrong all the time and contrarian investors will always look for opportunities created by excesses in the market. As said by Humphrey B Neill, author of The Art of Contrary ThinkingThe public is often right during the trends, but wrong at both ends.  This is the precise point on which contrarian investors try to capitalize on and wait. A contrarian investor understands and identifies the areas in the market where the crowd has overreacted, resists the temptation to go with the flow and builds a different portfolio than the trend and ultimately tends to benefit when the market realizes its excesses. 

Past is not Equal to Future

Majority in crowd believes companies, sectors and themes which have done well in recent past will continue to do well and those which had tough times in past will continue to struggle. Investors extrapolate the recent trends into the future and often ignore the reversal to mean. This imitation leads to excesses which creates opportunities for arbitrageurs and contrarians. 

Not everything which is falling is contrarian opportunities. To understand if the market prices are irrational in either direction, the contrarian investor must have framework to identify Businesses which have high entry barriers and strong moat which makes business a right to win, sectors which are not fragmenting and understanding the intrinsic value of the business which offers a great margin of safety.

Building a Contrarian Portfolio

“Markets can remain irrational for longer than one can remain solvent.”Contrarian investor who is constructing the different portfolio than the market needs know what to buy, when to buy and most important how much to buy? A balanced approach can be to start to building the position when the company is in the problem, increasing the weight when headwinds are turning into the tailwind and waiting for the rest of the market to realize the true potential. The contrarian investor too wants the crowd to join him ultimately, to enable him to gain from the investment.

Click here to check out ICICI Prudential’s Contra PMS.

While a contrarian investing strategy looks simple i.e. buying low and selling high, it has its own challenges of identifying changing trends, sector positioning, companies with leadership traits and margin of safety.

A contrarian strategy aims to capitalise on inefficiencies in the market and take advantage of mispricing opportunities. Here, you may want to focus on companies or sectors where sentiments are not favourable. It aims to invest in companies which have not been the flavour of the market but are expected to do well in the long run. You could invest in sectors where entry barriers are high or sectors that are in consolidation or companies in special situation. For example, you may have a sector that has been completely ignored by the market, given its past, yet if one is able to identify the right trigger for the company or sector such investments have the potential to unlock significant value. 

So at all points of times there would be some opportunity or the other from the market through which such a strategy could benefit over the long term. Thus, it can be termed as a strategy that aims to generate alpha in all types of economic and market environments.

We, at ICICI Prudential Alternative Investments, are aware that a contrarian investment process is subjective. So what one person may infer as contrarian opportunity, based on their research and analysis, may not necessarily be viewed as that by others. So while the method for identifying companies or contrarian opportunities may be different for each one, we aim to back our high conviction ideas through concentrated portfolios and sizing, which is basically the weightage allocated to stocks.  

To summarize, 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.

The views expressed by the author are his own and not specifically those of the AMC or its management.

Investor’s may invest with us directly as well. 

Risk Factors & Disclaimers

  • Investing in securities including equities and derivatives involves certain risks and considerations associated generally with making investments in securities. The value of the portfolio investments may be affected generally by factors affecting financial markets, such as price and volume, volatility in interest rates, currency exchange rates, changes in regulatory and administrative policies of the Government or any other appropriate authority (including tax laws) or other political and economic developments. Consequently, there can be no assurance that the objective of the Portfolio would achieve. Prospective investors are advised to carefully review the Disclosure Document, Client Agreement, and other related documents carefully and in its entirety and consult their legal, tax and financial advisors to determine possible legal, tax and financial or any other consequences of investing under this Portfolio, before making an investment decision. 
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