By Brian Brady, Matthews Real Estate Investment Services
Lenders are stricter, debt is more expensive and investors are wary of which assets they should plant capital into. What if investing in “low on the totem pole properties” is the best option? This investment strategy is called the contrarian approach.
The contrarian approach is an investment strategy characterized by purchasing and selling in contrast to the prevailing sentiment at the time. It assumes that the market often overreacts to negative news or events, causing assets to be oversold and undervalued.
So the objective is to invest in less popular real estate opportunities with the belief that the market will eventually recognize the true value of these assets. The result will be an increase in price, generating significant profits for the investor. Contrarian investors are more interested in buying asset classes that the market has beaten down to the level where they now have potential for future growth.
Scavenging: Chasing the Undesirables
To be a successful contrarian investor, one needs to have a deep understanding of the underlying assets and the market forces affecting them. This requires extensive research and analysis of financial statements, economic data, industry trends and other factors that can influence asset performance. Additionally, contrarian investors must have a strong sense of discipline and the ability to resist the urge to follow the crowd and invest in popular assets.
Contrarian investors often look for opportunities in assets that have experienced significant price declines or are currently being ignored by the market. An example of the contrarian approach is an office building that is being overlooked because of work-from-home trends. But the contrarian investor might find value in a subset of office buildings that require workers to show up for work daily, like medical office buildings.
Additionally:
- Value investors may look for undervalued assets based on financial metrics or earnings potential
- Growth investors may focus on assets with a high potential for future appreciation
The Pros and Cons of Contrarian Investing
The Advantages
- Potential for higher returns. As the process focuses on buying assets at a lower price and selling them when market sentiment improves, this can result in higher capital gains.
- Reduced risk. By avoiding popular assets that are already priced high and therefore have less room for growth, contrarian investors may be better positioned to weather the storm if the market declines.
- Avoidance of herd mentality. Because they focus on assets that are currently out of favor, contrarian investors avoid the herd mentality that often leads to overvalued assets. This approach can help prevent emotionally driven investment decisions.
- Less competition. Contrarian investors can find often overlooked and undervalued assets. By identifying these hidden gems, investors can generate higher returns by investing in assets that have significant growth potential.
The Disadvantages
- Timing challenges. It can be challenging to accurately time contrarian trades. Determining when a particular asset has reached its low point and is likely to start rising in value can be tricky.
- Extended underperformance periods. Contrarian investing can result in extended periods of underperformance, especially if market sentiment continues to move against the asset for an extended period. This can be challenging for investors seeking short-term returns.
- Limited liquidity. Contrarian investing often involves buying assets that are not widely traded, which can make it challenging to sell them quickly if market conditions change. In addition, the riskier nature of these investments can mean difficulty in securing financing.
Using the Contrarian Strategy
Overall, contrarian investing can be a powerful strategy for generating long-term investment returns. Still, it requires a patient and disciplined approach to identifying undervalued assets and avoiding the herd mentality.
As the queue of capital continues to build and the opportunities for finding yield or creating value dwindle, investors in real estate may consider contrarian or difficult-to-underwrite asset types. Working with an experienced capital markets professional will help navigate the unique investment strategy and evaluate the potential upside to betting on the underdog.
Inside The Story
Matthews' Brian Brady
About Amy Wolff SorterI love content. I love writing it, visualizing it, and manipulating it to fit into different formats. I have years of experience in working with content, both as creator and editor. The content I create and edit provides assistance with many goals, ranging from lead generation, to developing street cred through well-timed thought-leadership pieces. Content skills include, but aren't limited to, articles and blogs, e-mails, promotional collateral, infographics, e-books and white papers, website copy and more.
FAQs
Contrarian investing is choosing to put your money into assets that go against the grain of market sentiment. When the stock market is selling off, contrarian investors jump in and buy—or they sell when there's a flurry of buying.
What is the main feature of contrarian investing? ›
What Is Contrarian Investing? Contrarian investing refers to an investing strategy that looks for profit opportunities in trades that go against current market sentiment. For example, if the market is bullish, the contrarian investor is bearish and will look for opportunities to sell.
What is one element that supports the contrarian investment strategy? ›
This approach requires independent thinking, careful analysis, and a willingness to withstand short-term market fluctuations. Successful contrarian investors often profit from the eventual correction of market perceptions, exploiting discrepancies between intrinsic value and prevailing market sentiment.
What are the advantages of contrarian strategy? ›
The advantages of a contrarian investing strategy are:
- Buying stocks when they're out of favor creates a considerable margin of safety relative to the stocks' intrinsic values, theoretically reducing downside risk.
- Your portfolio is more likely to outperform the market on a long-term basis as a contrarian investor.
Because contrarians only buy stocks that are “on sale” due to negative market sentiment and sell stocks when they are “overpriced” due to popularity and positive sentiment, their portfolios tend to outperform benchmarks over the long term (e.g., several years).
What are the two major approaches to the investment process? ›
In trading, investing, and finance, two approaches help investors analyze markets and securities: fundamental and technical analysis. Each helps evaluate investment opportunities, and many traders blend both for a more comprehensive view.
What is an example of a contrarian approach? ›
A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricings in securities markets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company's risks, and understates its prospects for returning to profitability.
Which statement accurately describes a contrarian investment strategy? ›
b, The correct answer is "contrarian strategy." The objective of the contrarian investor is to purchase, at below-market prices, securities that are neglected by the majority of investors and then wait for the market to recognize their value.
What is a contrarian idea? ›
A contrarian is someone who goes against prevailing opinions and trends. Being contrarian is about knowing when to go against the grain and when to go with the flow. “The key is to think independently, not just differently” (Shakir). The contrarian mindset is about being comfortable with discomfort.
What is the most successful investment strategy? ›
Buy and hold
A buy-and-hold strategy is a classic that's proven itself over and over. With this strategy you do exactly what the name suggests: you buy an investment and then hold it indefinitely. Ideally, you'll never sell the investment, but you should look to own it for at least three to five years.
One of the most famous investors and an aficionado of the contrarian strategy is none other than billionaire investor and Berkshire Hathaway chairman and CEO Warren Buffett.
Which investment strategy carries the most risk? ›
The Bottom Line
Equities and real estate generally subject investors to more risks than do bonds and money markets. They also provide the chance for better returns, requiring investors to perform a cost-benefit analysis to determine where their money is best held.
What is the difference between value investing and contrarian investing? ›
Both strategies seek undervalued stocks but differ in their approach to market trends. While contrarian investors may base their investment decisions on prevailing market sentiment, value investors rely on fundamental analysis to identify undervalued stocks – not necessarily the behavior of other investors.
What is the opposite of a contrarian investor? ›
Trend-followers are those investors who buy stocks when the price is high and sell them when the price of a stock falls. However, contrarian investors trade oppositely. They buy the stock when the price is low and sell them when the price is high.
How do you deal with a contrarian? ›
“Ask them to respect how you feel by not taking such a confrontational approach when talking to you. And if there are certain topics that are especially difficult, such as politics, then call them out in particular and ask that they avoid them when talking with you.”
What is an example of a contrarian investor? ›
Notable contrarian investors. Bill Ackman is a contrarian investor who twice reinvested heavily in beaten-down Valeant Pharmaceuticals against prevailing market sentiments. Later, he short-sold Herbalife, but was forced to take a large loss after the stock failed to fall as predicted.
What is the contrarian rule of trading? ›
The contrarian trading rule is the opposite, a buy signal is emitted when the index level breaks the long EMA from above (price goes below EMA) and a sell signal is emitted when the index level breaks the long EMA from below (P > EMA).
What is an example of a contrarian? ›
In fact, most successful investors often behave like contrarians by "buying low and selling high"—that is, buying stocks that are cheap because most investors put a low value on them but that have the possibility of rising, and selling stocks that most investors are valuing highly but that seem likely to decline.
