Contrarian investing involves making investments that go against market trends and focusing on overlooked businesses in unpopular market sectors. It requires careful research and weighing the potential risk against the possibility of return.
Contrarian investing is a strategy that involves making investments based on factors other than market trends, projections based on past performance, and current industry indicators. In essence, contrarian investment is choosing to make an investment that would generally be considered contrary to normal investment procedures. This high-risk mode of investing is usually started with the idea of getting a good deal done before the rest of the investment world notices.
While on the surface contrarian investing appears to be based more on instinct than factual information, this is rarely the case. Investors who want to speculate in high-risk ventures of this nature generally try to focus on investment opportunities that are overlooked by others. For example, the contrarian investor may choose to focus on an industry that is not in favor at the moment and make an investment in a company within that industry that is stable and doing very well. By choosing to invest in overlooked businesses that are part of an unpopular market sector, the investor has a good chance of earning a significant return on investment while facing little to no competition to purchase shares.
The contrarian reversal can take place in both a bull market and a bear market. The key for the investor employing this strategy is knowing when to anticipate a market bubble and arranging to sell, while also choosing to buy during periods when the market is characterized by a high level of pessimism. This goes against the grain of the market and can be very risky. At the same time, the rewards can be significant.
The concept of investing against buying unfavorable stocks usually involves careful research into what the majority of investors are doing and then choosing to look for areas of the market that are being neglected. Once these areas are identified and evaluated, it is possible to determine if there is a significant chance of profit going in the opposite direction of most current market indicators. Far from relying on gut instinct alone, contrarian investing requires the application of logic, the collection of data, and carefully weighing the possibility of return against the potential risk.
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