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FINANCIAL CHRONICLE™ » EXPERT CHRONICLE™ » Contrarian Investing

Contrarian Investing

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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

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Post Sun Jul 13, 2014 3:20 am by FLOWER2

Contrarian ideas:

Look for stocks trading in the current box (follow fundamentals)
Stagnated large, mid and small ones after first small jump
Lower P/E stocks over market P/E
Unpopular stocks about to become popular due to improved fundamentals

Cheers

Post Sun Jul 13, 2014 8:53 am by stevenapple

@FLOWER2 wrote:Contrarian ideas:

Look for stocks trading in the current box (follow fundamentals)
Stagnated large, mid and small ones after first small jump
Lower P/E stocks over market P/E
Unpopular stocks about to become popular due to improved fundamentals

Cheers

I'm also like this theory.
Different perspective but valid reasons.

Post Sat Jul 19, 2014 4:02 am by VALUEPICK

Contrarians too will have their day. Currently their stocks are building strong bases. May be their day also is imminent after initial jump. We will wait and see. Good luck!

Post Sat Jul 19, 2014 6:58 pm by SHARK aka TAH

For Sure

SHARK aka TAH

Post Sat Jul 26, 2014 4:46 pm by SHARK aka TAH

Stock investing strategy: Contrarian Investing.

ollowing a strategy of going against the current views of the majority investors is called contrarian investing. Why do such investors take a contrary view? Because, they believe that certain consensus among investors can lead to wide mispricings in securities markets.
For example: A wide spread negative news or rumors about a stock may send the prices of that stock crashing. These investors try to spot such stocks and invest in it resulting in above average returns.

CONTRARIAN -THE BOLD APPROACH
A true contrarian is neither bullish nor bearish on securities. A contrarian investor takes a bold approach. The goal of a contrarian investor is to profit from the mispricings that an irrational market creates. Something similar to value investing. The only difference here is that, this approach relies more on market sentiments and investor behavior. Contrarian investing has more opportunities in markets which are emerging out of a bear phase. Typically, in such markets many stocks, which have a strong growth potential, quote at attractive valuations primarily because investors widely extrapolate news flow and performance of the recent past.
MISPRICED STOCKS
Contrarian investing works because of the psychology of market participants. During the beginning of a trend, buyers are cautious, and the more seasoned players are the primary participants. As the trend gains traction, more and more investors become aware of it, deploying more capital to take advantage of the market’s strength. Then at the end of the trend, when everyone who’s interested in buying into the trend already had — with no more available capital to sustain the already inflated prices, it’s incredibly easy for a panic to make stock prices tumble down.
A perfect example of this was the 2008 market crash. The trend started and it continued till all those who were interested in buying into the trend has put in their money. Then, Stocks sold off hard, all the seasoned players made money and the crowd was left with stocks purchased at higher prices. The prices of stocks tumbled and the crowd, unable to hold on, sold their stocks suffering heavy financial loss. At this point, the smart guys step in again and then, dramatically the stock regains much of that lost ground in 2010. This was a classic case of the crowd dramatically shifting sentiment. Those who thought opposite to what the crowd thought would have definitely made lot of money.

SPOTTING THE TURNING POINTS
So, then, if turning points are where the crowd is wrong, the biggest challenge is spotting them. You can spot turning points through fundamentals or technicals or by studying the general economic indicators.
1. Valuation
The theory behind valuation is simple. Buy when stocks look fundamentally cheap. Sell when the stock is expensive. Valuation, however, is not an easy process. It requires a strong understanding of fundamental analysis; it also requires its practitioner to attempt to make an objective decision about a subjective topic like “value.”
2. Technical Analysis
Another option for contrarians is to use technical analysis to spot reversals. Momentum, trend breaks, volumes, RSI all come into play here.
3. Quantitative and Economic Indicators
The last method skips looking directly at a security’s price and looks at broader economic indicators such as volatility index to spot turnarounds.
CONCLUSION.
Tracking these indicators- not any one of them –but all of them together, may help you to take a contrary position before the market starts to correct itself. Successful contrarians realize that turning points are key. So next time, I hope this little advice would help you to avoid getting trapped in a market crash and at the same time help you to spot turnarounds and profit from it.

http://www.sharemarketschool.com/stock-investing-strategy-contrarian-investing/

SHARK aka TAH

Post Sat Dec 20, 2014 11:27 am by SHARK aka TAH

How many of us read during the week-end Very Happy... This thread from the beginning is just a starting point.....

piras

Post Sat Dec 20, 2014 8:00 pm by piras

Well said.

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Post Sun Dec 21, 2014 3:32 am by hlsindrajith

Yes reading is essential for successful trading and at least more reading during the week ends

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