Contrarian investing is one of the more traditional methods of investing in shares. It's basically where you go against the crowd. For instance if everyone is buying tech shares, you might prefer to buy utility shares that are currently being largely ignored, and therefore grossly undervalued. The trouble is that this style of investing can be very dangerous in a bear market.
The global stock markets have seen massive falls all over the world in the last year or so and many stock market investors have lost a fortune trying to call a bottom to the market. Even high quality companies that are still likely to remain relatively strong throughout the recession have seen their share price fall and fall, so it's been a very tough trading environment.
It's a lot easier to make money in a bull market as a contrarian investor because even though the stock market as a whole tends to rise, there will always be times when certain companies are temporarily oversold. However in this market you are always battling against the trend because even though a low share price can value a company very cheaply, you know that the share price could still fall much further because the overall market sentiment is still so negative.
Of course if you are investing for the very long-term then this isn't so much of a factor because you probably won't be looking to sell your shares for another five or ten years, but a lot of investors are not as patient as this. In fact many long-term investors have decided that the stock market has dramatically changed in recent years and the days of buy-and-hold may be over because even some former market giants have gone bankrupt in recent years.
In my opinion there is an element of truth in this, and I think there are arguably greater profits to be had by trading shares on a short-term basis. The volatility in the stock markets at the moment means that you can make profits of upwards of 10-20% in a matter of a few days or weeks, whether you go long or short. Also many people would argue that traditional share investing is in many ways just as risky as short-term trading at the moment because of the economic downturn effecting so many companies.
So overall I think contrarian investing is very dangerous in these markets because it's so difficult to consistently call a bottom. For instance many so-called experts were calling a bottom on the FTSE 100 at 5000, 4500 and 4000 and yet all of them were wrong because the FTSE is currently trading at around 3700 (and who's to say it can't fall even further).
If you are going to invest in this way then I would suggest you take a very long-term view and only invest in the large market-leading companies, scaling into positions if possible. This is much more effective than trying to guess where the bottom is.
Author Resource:-
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