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Sri Lanka Equity Forum » Stock Market Talk » Expert Chamber » Contrarian Investing

Contrarian Investing

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1Contrarian Investing  Empty Contrarian Investing on Sat Jun 28, 2014 9:55 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
The forecasting Pitfall of Fundamental Analysis

The Association methodology is ‘contrarian’ because it is quite different than most applications of fundamental analysis.
The fundamental analysis technique is generally used by banks, pension funds and the majority of security analysts.  There are different styles of fundamental investing which range from momentum and growth investing to value and contrarian investing.

In general, a fundamentalist believes that a company’s true value can be determined by analyzing financial indicators such as sales, inventory etc.  A fundamentalist believes that a stock price can diverge from the company’s true value and he is convinced that the market must recognize this discrepancy over time.
Momentum and growth investing styles are out of the scope of the Contrarian Investing Association.  Although related to value investing, contrarian investing is quite different.
For value investors, Security Analysis by Benjamin Graham and David Dodd, is the investment “Bible”.  Value techniques stress the value of capital preservation and define risk as the potential for losing your savings.  A contrarian agrees with this.
But, this is where the similarities between value investing and contrarian investing begin to diverge.  With value investing, present earning power combined with the projection of a company’s earnings into the future is the principal method of valuing a stock.  An evaluation can be done to estimate what the share price should be, based on the price earnings ratio.  Other key ratios include return on equity (a measurement of how profitable the business is), and other measurements for measuring debt and potential for bankruptcy.
The problem with most types of fundamental investing is that most investors are willing to pay a premium, and overprice companies with ‘good’ near term prospects and under price companies which appear ‘poor’.  Not too smart.
This problem is amplified when security analysis emphasizes near term outlooks andplaces a heavy reliance on future forecasting.  A contrarian believes that this method can not work, because it is not possible to forecast accurately anything past the short term, and there are  too many unknown variables to ever do so accurately.
The Pitfall of relying on ‘Experts’:
Society places a high reliance of so-called financial experts to make projections into the future.  Experts are most often wrong – and when they are right, their forecasts are only accurate for the short term.  When an expert is asked for a projection – they are in effect attempting to read the future.  The information gathering is complex, to say the least.
The number of possible outcomes, when thousands of factors interact in the marketplace, is infinite. It is simply too difficult (more like impossible) to interpret the data and present a precise estimate.
A contrarian investor simply believes that analysts cannot predict the future and therefore will not have accurate forecasts.
Experts also demand as much information as possible to assist them in their decision making.  The more information an analyst has, the more confident the analyst is.  With more information available, the analyst should make better decisions but this is not the case. More information requires more human judgment and interpretation.  More information leads to greater expert confidence. This confidence leads analysts to optimism; hence- optimistic forecasts and up-beat company analysis.  Ultimately, this results in forecasting errors.  Not too smart to follow this path.
As can be seen in the article, “Analyst in Name only”, there is tremendous career pressure on analysts.  Analysts are not judged on the accuracy of their forecasts, but judged on the amount of business and commission a firm can gain.  Sure, an analyst can tell a great story about a company and its future prospects. The problem is that this story is more often based on fiction, than reality.
The modern day stock market as represented in the media (television, newspaper etc..) reports more like an emotional hockey or baseball game than a rational arena for financial decisions. Capitalizing on this extreme opinion is the core of contrarian investing.  Investors tend to put too much emphasis on the most recent information.  If the most recent news is bad, people forget about the good information that preceded it.  If the recent information is good, people tend to downplay the bad news that came before it.
The media over-focuses daily on news-breaking stories within companies and earnings releases. The stock market is constantly adjusting to surprises as presented in the news.
Earning surprises have a consistent and predictable effect on stock prices.
For the so-called “best stocks”, analysts have confidence and investors have high expectations  that expectations will be met.  Similarly, they have low expectations and low confidence in the so called “poor stocks”.  The consistent and predictable effects of surprises, such as positive or negative earnings surprises, are the basics upon which the Contrarian Investing Strategies are built. The strategies will cover these concepts in greater detail.



Last edited by SHARK on Sat Jun 28, 2014 11:09 am; edited 1 time in total

2Contrarian Investing  Empty Re: Contrarian Investing on Sat Jun 28, 2014 10:00 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
The low PE, PD, PCF and PBV strategy

Findings show that companies in which the market has high expectations, as measured by the above ratios, have consistently performed the worst.  The reason is, that a market premium is paid for near term ‘visibility’ on earning prospects.   

To evaluate the value of a company, forecasts must be made with extreme accuracy into the future.  We have already discussed this earlier – this is very difficult to do.  Investors and analysts also have confidence and optimism that earnings expectations will be met.  Over-confidence about information and forecasts, a reliance on ‘experts’, and over-optimism leads to a deadly combination.

This is something that you can easily see for yourself.  Identify the latest stock market darling and follow it until a negative earning surprise occurs.  This same effect happens again and again…

Findings also show that companies in which the market has low expectations, as measured by the below ratios, have consistently perform the best.  Low expectations is what this strategy is based on.

A study by David Dreman and Eric Lufkin, looked at the largest 1,500 publicly traded companies over 27 years.  The below table shows the significant results obtain by using this strategy over the long term.







Contrarian Investing
Low P/E$708,000
Low P/BV$685,000
Low P/CF$572,000
Low P/D$415,000
$10,000 Initial InvestmentMarket Return$289,000
19701996
A low P/E ratio (Price relative to Earnings) is often thought of as a typical Contrarian strategy.  This is a relatively straightforward strategy that saves an investor from over- managing a portfolio and helps reduce commission costs.  This strategy doesn’t require a lot of work to be effective.  Initially, you want to position yourself carefully and make fine tunings to the portfolio as needed.

Low P/E stocks also tend to have higher dividend returns which helps maintain the value of the stock through bear markets.

Also used are the Low P/CF (Price relative to Cash Flow), P/BV ( Price relative to  Book Value),  and P/D (Price relative to  Dividend) ratios .  Specifically P/BV is a tool that is heavily favoured by value guru Benjamin Graham.

Essentially this strategy buys solid companies that are currently out of favour as measured by their low price to earnings, price to cash flow and price to book value. 

Most expensive  (i.e. companies to avoid)



  • High PE

  • High P/CF

  • High P/BV

  • High P/D



Least Expensive (i.e. companies to investigate)



  • Low PE

  • Low P/CF

  • Low P/BV

  • Low P/D




Positive earning surprises have a positive benefit to low P/E stocks and generally a neutral influence on high P/E stocks. 
Negative earning surprises have less effect on low P/E stocks than on high flying P/E stocks.  

Expectations are very great for high P/E stocks: earnings disappointments are inevitable and it becomes only a matter of ‘when’.  This can be seen easily in the latest technology boom in companies with outrageous valuations.  

Expectations of low P/E stocks are already low; therefore, a negative surprise has little effect.



Last edited by SHARK on Sat Jun 28, 2014 11:09 am; edited 3 times in total (Reason for editing : Font size adjusted)

3Contrarian Investing  Empty Re: Contrarian Investing on Sat Jun 28, 2014 10:10 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
Contrarian Investing Philosophy

A Contrarian Investor, generally focuses on turnaround situations and stocks currently out of favor, practicing patience and long-term investing. 

Contrarian investors known as Contrarians looks for strongly financed, growing companies that are undervalued by the market for the wrong reasons, believing that the market will come to appreciate their true value over time.  This investing approach can also be described as Contrarian, since such stocks are purchased when most investors believe that they are unattractive.

It is also believed that by owning an undervalued quality stock, is a lower-risk method for seeking superior long-term returns. These stocks tend to be less susceptible to price declines in bear markets because expectations about their performance are already low.

In addition, these stocks may offer the benefit of a relatively high dividend yield, which provides the best protection against the downside of an investment.

Contrarians use a investing methodology that is based on the principle of ‘rationality’.  To be a rational investor, there is a need to be realistic about both the upside and downside to any investment.  An investor must first recognize the tendency to be both over optimistic and over confident in their investment decisions.  An investor must also recognize the tendency to over rely on so called ‘experts’ for investment decision making.

Over Reaction:

A Contrarians methodology is based on the principal that simply — people over react.  This tendency for over reaction, can be seen in your day-to-day life through your work environment, home life or even while you are on your vacation.  People are highly emotional creatures – especially when it comes to love – and love for money.

The same holds true for investors — investors simply over react. Investors overreact to both good and bad news.  There is an internal psychological pendulum in people that moves between optimism and pessimism. 

Investors overprice the so called “best investments” as can be seen in the latest technology bubble, and under price the “worst investments” as can be seen later in our Contrarian examples. 


  • Investors are simply too optimistic about stocks that appear to have good prospects.

  • Investors are simply too pessimistic about those that have so-so outlooks.



Last edited by SHARK on Sat Jun 28, 2014 10:16 am; edited 1 time in total (Reason for editing : Font size adjusted)

4Contrarian Investing  Empty Re: Contrarian Investing on Sat Jun 28, 2014 10:15 am

VALUEPICK

VALUEPICK
Expert
Expert
SHARKContrarian Investing PhilosophyA Contrarian Investor, generally focuses on turnaround situations and stocks currently out of favor, practicing patience and long-term investing. Contrarian investors known as Contrarians looks for strongly financed, growing companies that are undervalued by the market for the wrong reasons, believing that the market will come to appreciate their true value over time.  This investing approach can also be described as Contrarian, since such stocks are purchased when most investors believe that they are unattractive.It is also believed that by owning an undervalued quality stock, is a lower-risk method for seeking superior long-term returns. These stocks tend to be less susceptible to price declines in bear markets because expectations about their performance are already low.In addition, these stocks may offer the benefit of a relatively high dividend yield, which provides the best protection against the downside of an investment.Contrarians use a investing methodology that is based on the principle of ‘rationality’.  To be a rational investor, there is a need to be realistic about both the upside and downside to any investment.  An investor must first recognize the tendency to be both over optimistic and over confident in their investment decisions.  An investor must also recognize the tendency to over rely on so called ‘experts’ for investment decision making.Over Reaction:A Contrarians methodology is based on the principal that simply — people over react.  This tendency for over reaction, can be seen in your day-to-day life through your work environment, home life or even while you are on your vacation.  People are highly emotional creatures – especially when it comes to love – and love for money.The same holds true for investors — investors simply over react. Investors overreact to both good and bad news.  There is an internal psychological pendulum in people that moves between optimism and pessimism. Investors overprice the so called “best investments” as can be seen in the latest technology bubble, and under price the “worst investments” as can be seen later wrote:

  • Investors are simply too optimistic about stocks that appear to have good prospects.

  • Investors are simply too pessimistic about those that have so-so outlooks.


I like this. In 2013 we should have applied contrarian investment strategy to pick stocks. Even now we can apply it for some sectors and stocks. Some of the worst sectors and stocks in 2013 are sowing some strength now. Contrarian Stock Investors Look Beyond the Crowd. In many ways, contrarian investing is similar to value investing. In both cases, the stock investor is looking for mispriced stocks. There are misprices stocks in the CSE. They have gone down due to herd mentality.  Good news for contrarian investors. Unfavourable industries should become favourable industries from the second half of this year onwards.

5Contrarian Investing  Empty Re: Contrarian Investing on Sat Jun 28, 2014 10:19 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
Warren Buffet Investment Philosophy

Warren Buffett’s philosophy can be summarized into key principles:

If you had invested $100 in Berkshire Hathaway when he took over in 1965, you would have about $220,000 today.   He views investing as buying a piece of a business, rather than “renting” shares of a company for the short term.

Buffett looks at business fundamentals and prefers a business that is:

1. simple and understandable.
His purchases are not determined by gloomy economic forecasts, or pessimistic stock market forecasts.  He tends to put fairly large sums of money into things that he knows and management that he trusts.  He doesn’t invest in companies outside his ‘circle of competence’. If you understand the industry, you should not stay out just because he does.  For example, Buffett until recently, has shied away from the technology sector.

2. consistent operating history.
Buffett looks at the following indicators, which include return on equity, changes in operating margins, debt levels, and capital expenditure needs, and cash flow.  Buffett watches Wall Street only to the extent necessary to take advantage of shortcomings of the market.

3. favorable long-term prospects.
A good business does not always mean it’s a good purchase, although it is a good place to look for one.  The best businesses to own are ones that can over time employ large amounts of capital at very high rates of return.

Buffett buys using a buy-and-hold strategy that has financial advantages over other strategies that emphasize short-term trading.  This is because when short-term trading is used, you end up paying tax on the proceeds before they are reinvested.  This results in an erosion of capital over time.

Buffett’s companies generally have a strategic advantage over other companies in its industry.



Last edited by SHARK on Sat Jun 28, 2014 11:08 am; edited 1 time in total

6Contrarian Investing  Empty Re: Contrarian Investing on Sat Jun 28, 2014 10:24 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
 Contrarian Investing Books to read

The Five Rules for Successful Stock Investing: Morningstar’s Guide to Building Wealth and Winning in the Market by Pat Dorsey
OVER the years, people from around the world have turned to Morningstar for strong, independent, and reliable advice. The Five Rules for Successful Stock Investing provides the kind of savvy financial guidance only a company like Morningstar could offer. Based on the philosophy that “investing should be fun, but not a game,” this comprehensive guide will put even the most cautious investors back on the right track by helping them pick the right stocks, find great companies, and understand the driving forces behind different industries-without paying too much for their investments.

Written by Morningstar’s Director of Stock Analysis, Pat Dorsey, The Five Rules for Successful Stock Investing includes unparalleled stock research and investment strategies covering a wide range of stock-related topics. Investors will profit from such tips as: How to dig into a financial statement and find hidden gold . . . and deception How to find great companies that will create shareholder wealth How to analyze every corner of the market, from banks to health care Informative and highly accessible, The Five Rules for Successful Stock Investing should be required reading for anyone looking for the right investment opportunities in today’s ever-changing market.
The Contrarian Investor’s 13 by Benj Gallander
Benj Gallander has among the highest returns, both short- and long-term, in North America. Co-editor of Contra the Heard Investment Letter, columnist for The Globe and Mail, writer for Bloomberg and Canadian MoneySaver, Gallander’s approach has the investment world buzzing.His approach to investing is decidedly contrarian. He does not believe in buying and holding until perpetuity. He thinks that stop losses are idiotic, like playing cards with your hand open. He redefines conventional norms of the risk-reward relationship. He rarely buys a stock that does not have a chance of a minimum 100 per cent return. He remains unconcerned with the daily pulse of trading.
This ability to dance against the herd has led to a ten-year annualized return of 25.4 per cent with a staggering 64.8 per cent in the meltdown of 2001.
The Contrarian Investor’s 13 focuses on the basics of his controversial methodology and philosophy, and the rules around which Benj has structured his investment approach. His goal is simple: to show people how to improve their financial returns by themselves, reducing their dependence on brokers and advisors.
Contrarian Investment Strategies : The Next Generation : Beat the Market by Going Against the Crowd by David N. Dreman
David Dreman’s name is synonymous with the term “contrarian investing,” and his contrarian strategies have been proven winners year after year. His techniques have spawned countless imitators, most of whom pay lip service to the buzzword “contrarian,” but few can match his performance. His Kemper-Dreman High Return Fund has been the leader since its inception in 1988 — the number one equity-income fund among all 208 ranked by Lipper Analytical Services, Inc. Dreman is also one of a handful of money managers whose clients have beaten the runaway market over the past five, ten, and fifteen years.
Contrarian Investment Strategies: The Next Generation shows investors how to outperform professional money managers and profit from potential Wall Street panics — all in Dreman’s trademark style, which The New York Times calls “witty and clear as a silver bell.” At the heart of his book is a fundamental psychological insight: investors overreact. Dreman demonstrates how investors consistently overvalue the so-called “best” stocks and undervalue the so-called “worst” stocks.
Contrarian Investing : Buy and Sell When Others Won’t and Make Money Doing It by Anthony M. Gallea, William Patalon, Jim Rogers
How to succeed and profit by NOT following conventional trends, that is the secret to Contrarian investing: buy assets that are out of favor. Here, Anthony Gallea a Contrarian with impressive credentials and William Patalon a savvy business writer — explain this strategy for everyone in the market: novices and professionals alike. Gallea and Patalon show how the Contrarian approach can be systematized. They identify the key indicators backed by solid research that tell an investor when to buy and sell stocks. The authors have created a set of guidelines or trading rules that any investor can learn and put to immediate use.
The Intelligent Investor by Benjamin Graham
The classic bestseller by Benjamin Graham, perhaps the greatest investment advisor of the 20th century, The Intelligent Investor has taught and inspired hundreds of thousands of people worldwide. Since its original publication in 1949, Benjamin Graham’s book has remained the most respected guide to investing, due to his timeless philosophy of “value investing,” which helps protect investors against the areas of possible substantial error and teaches them to develop long-term strategies with which they will be comfortable down the road.
Over the years, market developments have borne out the wisdom of Benjamin Graham’s basic policies. Here he takes account of both the defensive and the enterprising investor, outlining the principles of stock selection for each, and stressing the advantages of a simple portfolio policy. Among the book’s special features are the use of numerous comparisons of pairs of common stocks to bring out their elements of strength and weakness and the construction of investment portfolios designed to meet specific requirements of quality and price attractiveness.
Security Analysis by Benjamin Graham
This classic book secured Benjamin Graham’s status as a Wall street immortal. the carefully honed methods for finding undervalued stocks and bonds he described here have never been equaled, and have already outlived their author by more than 20 years. Even as Security Analysis has gone through five editions and nearly a million copes, you can learn time-tested investment secrets and strategies by going back to the source – THE ORIGINAL – and paying close attention to its wisdom. Written just five years after the crash, Security Analysis’s message today is just as vivid, just as lucid, and just as vital as it was in 1934.
The Vital Few vs. The Trivial Many by George Muzea
Filled with in-depth insight and expert advice, The Vital Few vs. The Trivial Many will open your eyes to a new way of looking at the investment world, especially the stock market. You’ll discover how to look past media hype to discern what the Vital Few or corporate insiders—those who know their companies best—are doing.
By explaining which information is accurate and valuable, as opposed to that which is misleading and financially hazardous, investment professional George Muzea will show you how to successfully and intelligently evaluate the stock market and find valuable gems that have yet to be discovered by the masses.George Muzea has nearly forty years of experience as an investment professional.
He is founder and President of Muzea Insider Consulting Services LLC, which advises well-known money management firms and whose impressive client list includes famed speculator George Soros’s right-hand man, Stanley Druckenmiller, and other former Soros Fund Management partners. Muzea is frequently quoted in both print and broadcast media and is a popular speaker at investment forums nationwide.
One Up On Wall Street by Peter Lynch
Lynch, former director of the Fidelity Magellan Fund, one of the nation’s largest equity funds, argues that average investors can beat Wall Street professionals by using the information that they encounter in their everyday lives. For example, Lynch invested in Hanes after his wife told him about the popularity of L’eggs pantyhose.
Other winning stocks that average investors could have picked well before Wall Street became aware of them include LaQuinta motels, the Limited clothing store chain and Agency Rent-A-Car, note the authors. He advises readers to look for spectacular growth among companies that sound dull; do something disagreeable (like funeral homes) are spinoffs; are buying back their own stock. He cautions readers to avoid companies touted as the next IBM or Xerox; that are diversifying (“diworseifying”); that depend on a single customer. The book is also a primer on how the stock market works and is written in a light, entertaining style. Contrarians will be able to put the shrewd insights presented to good use!
Common Stocks and Uncommon Profits by Philip A. Fisher
Widely respected and admired, Philip Fisher is among the most influential investors of all time. His investment philosophies, introduced almost forty years ago, are not only studied and applied by today’s finance professionals, but are also regarded by many as gospel. He recorded these philosophies in Common Stocks and Uncommon Profits, a book considered invaluable reading when it was first published in 1958, and a must-read today.
Acclaim for Common Stocks and Uncommon Profits
“I sought out Phil Fisher after reading his Common Stocks and Uncommon Profits…When I met him, I was impressed by the man as by his ideas. A thorough understanding of the business, obtained by using Phil’s techniques…enables one to make intelligent investment commitments.”-Warren Buffett



Last edited by SHARK on Sat Jun 28, 2014 11:07 am; edited 1 time in total

7Contrarian Investing  Empty Re: Contrarian Investing on Sat Jun 28, 2014 10:36 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
Taking Advantage of Irrational Behaviour Strategy

This strategy is a variation of strategy #1. It looks at relative industry strength and investor sentiment.
Indicators


  • Down by 50% off 52 week low
  • Bottom of cycle
  • “Maximum market pessimism”


  • Low relative Price/Earning
  • Low relative Price/Sales
  • Low relative Price/Book


  • Low relative debt-to-equity
  • Interest coverage ratio
  • Cash flow

A Contrarian stock
 Down by 50% off 52 week high.
We talked earlier about how the media over focuses daily on individual companies and sectors. One thing that can be done is to listen to the popular press with an ear tuned for these extremes.
Phrases such as “disaster”, “doomed” and “dead” will be used to describe such a market.
Business Week once ran a cover declaring “Stocks are Dead”. Come on… As an Contrarian investor, the Media is simply not on your side of thinking. But this is used to the Contrarian advantage. The news media helps forge the mass opinion that contrarians try to go against. Remember we talked earlier about ‘Experts’. Experts are a real contributor of mass opinion. So once again Expert confidence in their opinions is seen. When there is a consensus – it represents an extreme in opinion.
Lets be honest, the Media by its very nature must sell papers, magazines and its television programming to a competitive viewing audience. It must make interesting content where no content exists to sell their medium. Their ultimate goals is to sell Advertisements first and provide content second.
It still seems irrational to believe that everyone can be wrong about something? Think about this.
People feel comfortable when they are with the crowd. As a society, we are told to conform. This makes people very susceptible to what is called Group Think. Group Think occurs when everyone within a group thinks the same way. Society actually encourages group think in encouraging team structure where people work together on a common vision. Within a team, when a member provides an opinion that is not consistent with the rest of the group, that member is either ignored or overruled by the majority. There is no encouragement or positive reinforcement to go against ‘group think’ because it is viewed by other teams members as ‘uncooperative’ and ‘out of touch’. So we are all naturally conditioned to think in away which seeks society approval.
So as a Contrarian, you are going to have to recondition yourself to trust your own ability to perceive, interpret and evaluate the environment around you independent of your peers, society and the crowd. This is not easy to do. It is a trade off – you will receive comfort and encouragement if you go with the crowd, or you will receive solidarity if you think independently. These are some of the reasons why people go with the crowd and why the crowd is most often wrong.
Investing in stocks is a strange transaction. It is the only product in which the more expensive the product gets, the more customers that want to buy them. That doesn’t happen normally for buying a Television, a car or a house. Usually people shop for bargains and want to pay the lowest price possible for a good.
In the market, people are doing the exact opposite of what they should be doing. When a stock rises, investors believe that a stock will continue to rise, in a gold rush mentality. Most investors become interested and start buying. Investors are attracted to action, by the potential for profit. People have a way of projecting into the future a straight line based on the past. Unfortunately, this rarely continues. When stocks begin to drop, most investors are not afraid because of the previous reinforcement of gains. This path results in a buy high, sell low result. Not too smart.
Capitalizing on such “extreme” opinion is the core of contrarian investing. Consensus building and extreme opinion created the tech bubble. JDSU is a clear example of optimism and extreme opinion. A clear example of buying high and selling low for many investors.
The following contrarian strategy uses a set of criteria that help remove the subjectivity of what is ‘out of favour’. These indicators help form a proxy for investor sentiment.
Strategy:
The price of a company’s stock in an auction-style market such as the NYSE or the TSE can reach dramatic heights of volatility over the course of a year. The value of that same company rarely fluctuates with the same ferocity. The 52-week highs and lows are a good place to start when studying a stock. If a large number of companies in the same industry are near their 52-week lows, there’s a good chance that the industry is out of favour. The key is to distinguish between the companies that are out of favour with justification, and those that are out of favour without rational justification. To determine whether a company is down by 50% off its 52 week high, simply check to see if the current price of the company is less than half of its 52W High. If it is, you may be on to something.
 Bottom of cycle.
One of the most difficult aspects of timing your purchase is determining when an industry is at the bottom of its cycle. An industry is usually at or close to the bottom of the cycle when there appears to be maximum market pessimism. Warren Buffett once said that “optimism is the enemy of the rational buyer.”
 “Maximum market pessimism”
While there is no true objective measure for determining maximum market pessimism, you can usually get a good feel for an out-of-favour sector merely by glancing at headlines in the financial section of your local newspaper. Dark or gloomy forecasts for an industry are usually good indicators that the bottom of the cycle is imminent.
The following indicators can be used as proxy for investor sentiment.

  •  Low relative Price/Earning
  • Low relative Price/Sales (Less than 1.0)
  • Low relative Price/Book (Less than 1.0)

 PAST EXAMPLES: TOBACCO
One dramatic Contrarian play was the Tobacco industry. It met the our three Step-1 indicator. We analyzed two companies that are leaders in this sector: Phillip Morris (M) and RJR Reynolds (RJR)
Down by 50% off 52 week high
Both Phillip Morris and RJR met this criteria. For example, in prior years Phillip Morris averaged around $40 (peaking close to $60). At $19, it met our “Down by 50″ rule. We bought!
Bottom of Cycle
While Tobacco will always have a steady market (nicotine is addictive and most people are weak), the industry was under appreciated during the recent irrational technology boom (see Irrational Exuberance). The market ignored high dividend yields, steady revenues, profitability and cash flow. Instead it chased “Castles in the Sky” like eToys (with a market cap greater than Toys R Us) or Pets.com. Not too smart!
Maximum Market Pessimism
During the time, the great masses thought the courts would destroy big tobacco with frivilous lawsuits. Obviously this did not happen. The market was to pessimistic.



Last edited by SHARK on Sat Jun 28, 2014 11:06 am; edited 1 time in total

8Contrarian Investing  Empty Re: Contrarian Investing on Sat Jun 28, 2014 10:38 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
Dhan : Look at the Example CTC in Srilanka & Phillip Morris Looking for 50% correction of 1400Rs works out Rs 700/- Smile

That's a contrarian strategy #2

9Contrarian Investing  Empty Re: Contrarian Investing on Sat Jun 28, 2014 10:52 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
I request all members to READ READ and READ articles on Value & Contrarian Investing Styles.
Some books have been named in this thread.
You can google and may find it free if you are lucky.
Reading must be encouraged, where your knowledge becomes your weapon in investing.
It will not destroy you but will be to your advantage.

I will post few more strategies for the benefit our member community.

Good Luck

Reading
SHARK



Last edited by SHARK on Sat Jun 28, 2014 10:57 am; edited 1 time in total

10Contrarian Investing  Empty Re: Contrarian Investing on Sat Jun 28, 2014 10:54 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
Defensive Investing Strategy
               
There seems to be a lot of talk about stock dividends and other fixed income investments.  Dividend paying equities have always been core components of any contrarian’s portfolio.  Contrarians by nature are part-active and part-passive.
Before making a stock selection, the intelligent investor should keep two key concepts in mind.  First they should question, whether they are investing or speculating with regards to a purchase that is made.  Secondly they should question, whether a stock selection is good value by fully understanding the concept of margin of safety – the difference in market price versus underlying value.
 
The single most important intellectual development of defensive investing comes from our mentor Benjamin Graham in his book entitled “The Intelligent Investor”.
One of the most striking points made, is that over time, the general population views of what constitutes as ‘speculative’ versus an ‘investment’ has changed.  During the early 1930’s all stock investments were viewed as speculative.  General attitudes considered stock investing equivalent to gambling.  It was viewed as not safe and the general population was not familiar it.
In today’s world, we are bombarded by advertisements from banks and brokers where they heavily promote so called “investing” by using both expensive and convincing print-materials, television, radio and magazines Ads. 
Oddly, everyone who buys or sells a security or mutual fund, regardless of the price paid or what is purchased, is considered as an ‘investor’ in today’s world.  But this is not so.
A few years ago, a poor friend of mine, relatively new to investing arrived from China with $300,000 USD in cash.  Her broker recommended historically unproven and expensive companies like Amazon, @ Home and Nortel Networks.  She truly believed that she was investing, while it is now clear that she was speculating.  Unfortunately, she returned to China poorer, and took a strange solace in her loss knowing that she was not alone.
An important lesson illustrated here comes from Benjamin Graham.  Not everyone in the market is an ‘investor’ and therefore the market contains many undesirable investment choices.  
Many stocks are lethal to your financial health.  Unfortunately, part of the population may actually be speculating while believing that they are investing.
How does one know?  Graham identifies an investment grade equity as one that provides a safety of principal and an adequate return.  Investments outside of this definition are regarded as speculative.
There is no doubt that there is a speculative component to all equity investments. Where there is risk there is opportunity both for profit and for loss.  An investor must be prepared financially and psychologically for adverse results that may be short or long-term in nature. 
Graham defines risk as permanent loss or in other words ‘erosion of capital’. Accordingly, temporary declines in your holding do not necessarily define a true risk of loss.  His rule is never to buy after a major advance and never sell after a decline.
A defining characteristic of all defensive stocks is that they pay a fair dividend.  The whole purpose of investing money is to share in the profits of the entity.
Some of the money will be paid to you now, while the remainder will be reinvested, which should result in increased future dividends, earnings and ultimately share price.  
An investment is proven unsafe when (1) a security is purchased for dividend and that dividend is discontinued or (2)  an investor is required to sell at a price below what is paid.
The major distinction between an investor and the speculator is in their attitude towards stock market movements. 
The speculator primary interest lies in anticipating and profiting from market fluctuations while the investor’s primary goal lies in acquiring and holding suitable securities at suitable prices. 
Low prices provide an investor an opportunity to buy and high prices an opportunity to sell.  The more optimistic the market gets over a stock and the faster its advances relative to earnings, the riskier the stock becomes. 
A continuous dividend paying record is extremely important with a proper dividend payment policy.



Last edited by SHARK on Sat Jun 28, 2014 11:05 am; edited 2 times in total

11Contrarian Investing  Empty Re: Contrarian Investing on Sat Jun 28, 2014 10:57 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
Contrarian Minded Investor



Believe it or not, Contrarians are not alone in their investment beliefs, although at times it feels like it.

It is not easy to be a Contrarian minded investor, in today’s fast-paced and get-rich-quick ideological investment environment.  





One of the most difficult aspects of a contrarian strategy is the strategy’s execution.  As  investors, we face uncertainty when we invest our capital.  It represents our savings and our financial security.  An investor suffers the ultimate consequence of an erosion of capital when a bad decision is made. 

The success of a contrarian investing strategy requires the investor to go against gut reactions, and against the prevailing beliefs in the general market.  Going against the crowd, is not easy to do. This is why most investors don’t do it.  

But this is also why most investors and financial managers do not beat the performance of the market index.  Most of us, are influenced by societal pressures (co-workers, friends, family), that encourage the social norm.  Deviant thinking from the norm is difficult because of the lack of positive reinforcement for doing so.

The reality is that a contrarian strategy takes time, discipline and patience — and most investors will give up on contrarian investing in the short run because there is optimism somewhere else in the market.  Most people are drawn towards exciting new concepts and ideas with a hope for an investment home run.  This home run approach is just not realistic as can be seen in the latest technology bubble and burst. 

Still, most investors who try contrarian investing will  not be able to stick it out for the long term, simply because of these optimistic and pessimistic psychological influences. 

In summary, Contrarians live by the following rules:


  • We concentrate on turnaround situations, and stocks currently unpopular but likely to regain popularity in the medium to long term future.
  • We focus on stocks that have the ability to appreciate in value – by using the Contrarian strategies.
  • We analyze management’s ability to achieve stated goals and take the appropriate action.
  • We invest only in organizations that have existed for at least ten years.
  • We stay up-to-date on current events; focus on key, out-of-favour industries; and shop for bargains which allow for optimal returns.
  • We normally sell 50% of a stock upon achievement of our rational target price, while “market timing” the remainder.
  • We practice patient, long­term investing, while ignoring the daily fluctuations of the market.
  • We advocate strict diversification in our portfolio.
  • We remain independent and skeptical of every broker, corporation or financial institution.



Last edited by SHARK on Sat Jun 28, 2014 11:04 am; edited 1 time in total

12Contrarian Investing  Empty Re: Contrarian Investing on Sat Jun 28, 2014 11:03 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
Contrarian Investing is a Rational Approach to Investing
               
Contrarian Investing uses an investing methodology that is based on the principle of ‘rationality’.  To be a rational investor, there is a need to be realistic about both the upside and downside to any investment.  An investor must first recognize the tendency to be both over-optimistic and over-confident in his or her investment decisions. An investor must also recognize the tendency to over-rely on so called ‘experts’ for investment decision making.
The Contrarian methodology is rational because it attempts to determine if an individual company, industry or even an entire market is over-priced (irrational exuberance) or under-priced.  A contrarian remembers that there were large periods of time in history in which investors received little or no return for being invested in the stock market.
 
Efficient Markets?  
The Association’s methodology is ‘contrarian’ because it disagrees with the efficient market hypothesis.  The efficient market hypothesis states that stock prices reflect everything known about a company, an industry or an economy.  Efficient market hypothesis states that stock prices cannot be predicted and that nobody can beat the market over time. Conversely, Contrarians believe that the market can be beat, by simply keeping a rational investing viewpoint: Contrarians control internal optimistic and pessimistic feelings and are independent thinkers.

Technical Analysis and Charting?
The Association’s methodology is ‘contrarian’ because it disagrees with technical analysis and charting techniques.  If the efficient market hypotheses were to be true, technical analysis and charting would not be useful in predicting stock price movements because the current price would always be based on the current situation of the company.  If the efficient market hypothesis were to be false, technical investors would believe that by studying charts and indicators, they could accurately project past performance into the future.  Not too smart.  
A contrarian believes that forecasting cannot accurately been done.
 Over-Reaction:
The Association’s methodology is based on one simple principle: people over-react. This tendency to over-react can be seen daily –at work, at home or even on vacation.  People are highly emotional creatures –- especially when it comes to love and love for money.
The same holds true for investors: investors over-react.  Investors over-react to both good and bad news.  There is an internal psychological pendulum in people that moves between optimism and pessimism.
Investors overprice the “best investments” as can be seen in the latest technology bubble, and under price the “worst investments”. This will be shown in our examples later.

  • Investors are simply too optimistic about stocks that appear to have good prospects.
  • Investors are simply too pessimistic about those that have so-so outlooks.

Contrarian Strategy Execution:
One of the most difficult aspects of a contrarian strategy is the strategy’s execution.  As investors, we face uncertainty when we invest our capital.  It represents our savings and our financial security.  An investor suffers the ultimate consequence of an erosion of capital when a bad decision is made.
The success of a contrarian investing strategy requires the investor to go against gut reactions, and against the prevailing beliefs in the general market.  
Going against the crowd, is not easy to do.  This is why most investors don’t do it.  But this is also why most investors and financial managers do not beat the performance of the market index. Most of us are influenced by societal pressures (co-workers, friends, family) that encourage the social norm.  Deviant thinking from the norm is difficult because of the lack of positive reinforcement for doing so.
The reality is that a contrarian strategy takes time, discipline and patience — and most investors will give up on contrarian investing in the short run because there is optimism somewhere else in the market.  Most people are drawn towards exciting new concepts and ideas with a hope for an investment home run. 
This home run approach is just not realistic as can be seen in the latest technology bubble and burst.
Still, most investors who try contrarian investing will simply not be able to stick it out for the longer term, because of these optimistic and pessimistic psychological influences.

13Contrarian Investing  Empty Re: Contrarian Investing on Sat Jun 28, 2014 11:27 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
Reading is 1 thing and applying your knowledge practically is another.

Let us make a promise to our selves that our hard-earned money will be used for Stocks that fall  under these strategies...

This is for all contrarians ........

_/\_
Shark

14Contrarian Investing  Empty Re: Contrarian Investing on Sat Jun 28, 2014 11:33 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
For the comfort of many Value Investing & Contrarian Investing threads have been moved to Expert Chamber Smile This will ensure the thread is kept alive for the benefit of our SLEF community.
All members are treated as part of SLEF family  Very Happy

15Contrarian Investing  Empty Re: Contrarian Investing on Sat Jun 28, 2014 11:37 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
I wish this thread is not a considered as another ordinary post.... all are welcome to discuss stocks falling into contrarian method/style investing strategy.

So go ahead fellow members and look into your PF holding whether how many of shares fall into this style investing, and I am sure you should be proud if its meets at least 75%

16Contrarian Investing  Empty Re: Contrarian Investing on Sat Jun 28, 2014 3:01 pm

VALUEPICK

VALUEPICK
Expert
Expert

There are plenty of contrarian stocks in the market. It is also time to look for contrarian value stocks. Some contrarian stocks are illiquid. Liquidity will improve in a major uptrend. Some have great growth potential. You are very clever you have some contrarian stocks in your portfolio. I have two contrarian stocks and I am keeping them very safely.

17Contrarian Investing  Empty Re: Contrarian Investing on Sat Jun 28, 2014 9:12 pm

SHARK aka TAH

SHARK aka TAH
Expert
Expert
I made the list already VP  Very Happy 

Do you have list as well, so we can compare  Laughing 

18Contrarian Investing  Empty Re: Contrarian Investing on Sun Jun 29, 2014 5:07 pm

stevenapple


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
SHARK wrote:I wish this thread is not a considered as another ordinary post.... all are welcome to discuss stocks falling into contrarian method/style investing strategy.

So go ahead fellow members and look into your PF holding whether how many of shares fall into this style investing, and I am sure you should be proud if its meets at least 75%

As you said this is not a ordinary post. Real depth is there. Theory is simple ,make sense and would help even in our other daily affairs. Thanks for Sharing.

19Contrarian Investing  Empty Re: Contrarian Investing on Sun Jun 29, 2014 5:13 pm

stevenapple


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
@VALUEPICK wrote:
There are plenty of contrarian stocks in the market. It is also time to look for contrarian value stocks. Some contrarian stocks are illiquid. Liquidity will improve in a major uptrend. Some have great growth potential. You are very clever you have some contrarian stocks in your portfolio. I have two contrarian stocks and I am keeping them very safely.

Contrarian theory is understandable but the stocks. Are you reffered as contrarian stocks for the stocks which might be attracted to Contrarian. ( May be ALLI, LIOC in present market )

20Contrarian Investing  Empty Re: Contrarian Investing on Sat Jul 05, 2014 6:16 pm

SHARK aka TAH

SHARK aka TAH
Expert
Expert
Has any one compiled List of Contrarian Stocks Smile

I have few

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