Young and Invested

Especially for this topic, I think a quote is in order to commence:

“The man who wants to lead the orchestra must turn his back on the crowd.” (James Crook)

I have no idea who James Crook is, but his funny observation definitely makes you think a little bit about the way the world works. To me, it’s a perfect microcosm of the investing arena, where the best in the field, such as Warren Buffett, Mark Ripple, Dave Dreman and Peter Lynch, have always advocated going against the general direction of the markets. A part of me believes that contrarian investing almost does not make sense, since who would be foolish enough to not follow the advice of these veterans? But, books keep being published about contrarian investing, in which the authors continuously claim that only a tiny proportion of investors are in fact contrarian. This reassurance keeps sparking my interest about the topic.

So, my next few posts will pertain to the basics of contrarian investing from what I have read and researched, with this first post acting as introductory.

To define, contrarian investing has been said to be closely related to value investing, in which the hunt is for equities (or other investments) that are undervalued due to lack of popularity (small countries like Ghana and Malaysia), adequate attention for proper valuation (funeral home equities), excitement (garbage collection companies) etc. This is precisely the area where a lot of contrarians have made fortunes, and these types of investing opportunities for equities are often signified by low P/E ratios, low price-to-book ratios and other similar measures. As with any good recipe, a lot of these investors simply let the cake bake long enough after finding undervalued batter, and then reel in the (fully baked) dough.

Still… an issue that used to bug me is why this type of maverick strategy is needed in the first place, and it is most likely because some mavericks believe the rest of the crowd’s strategy is somehow flawed. We’ll investigate this in the next post with some intriguing thoughts and research.

Image credit: Krystn Palmer under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License.

Last 3 posts by Daniel Eskin

• Short-term Versus Long-term Investments - March 16th, 2010
• Expert Interview - Puru Saxena - March 9th, 2010
• Memory of a Crisis - March 8th, 2010