• Common sense investing and being contrarian

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    One of the weird things people say all the time is that to succeed in investment, you need to be a contrarian. For example, this article: How to strike it rich by investing against the herd like Warren Buffett: The personality test and tips for contrarian investing.

    As defined in wikipedia:

    A contrarian is a person who takes up a contrary position, especially a position that is opposed to that of the majority, regardless of how unpopular it may be.

    To be really successful in investment (whether in property, shares, etc), my advice is:

    1. Know yourself first. If you are a gambler, learn how to curb your worse instincts. If you are too conservative, diversify and take some measured risk.
    2. Manage your risk. Never put all your eggs into one basket.
    3. Buy low and sell high. This phrase is so overused that i need to explain: Invest your time first to learn. Then wait for the dips in the market to invest your money.
    4. Good potential. Buy assets which are high growth or give a good dividend or rental.
    5. Do some basic research. The Internet provides lots of free information such as company annual reports and property prices. Don’t just follow rumours.
    6. Be patient and don’t panic. If you made sensible decisions, a drop in prices will only be temporary.
    7. Look after your investments. They are like kids. If you look after them properly, one day they will grow up and hopefully look after you!

    The only part of the advice that is a little bit contrarian is “Don’t just follow rumours.” A lot of investment advice from supposedly reputable experts are actually rumours, given out for their own financial gain, or a casual remark that might have no basis. So being contrarian here is just developing your own investment skill so you don’t have to believe everything at face value.

    Some people say that being contrarian is buying when the market is cheap because nobody is buying. The truth is, when the market is very cheap, there is probably a financial crisis going on, and nobody has much money. Secondly, no one could be buying if there is a fear that the market could go even lower. But this risk happens in any major purchase. We could buy a nice house and it turns out that it is in a flood prone area. We could buy a car that appears to be a bargain, but actually has electrical problems. That is why we need to be sensible and do research first, and buy only when it really is a bargain. A safe strategy to use when buying cheap is to wait until the downturn slows down and buy on the upswing.

    Ultimately, investment is about common sense, managing risks and finding good assets to invest in. Warren Buffett, the famous investor, never talks about contrarian investing. Instead he talks about finding undervalued companies and buying into their business.

    PS: An interesting article from USA Today: Contrarians rarely succeed.

    Update 6 Nov 2013

    Warren Buffett is famous for the contrarian saying:  “be fearful when others are greedy and greedy when others are fearful.” The full quote from his 2004 shareholder letter is: “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.”

    Warren is not advocating being greedy when others are fearful: he’s saying don’t be greedy at all! But if you don’t want to follow his advice, at least be fearful when others are greedy and greedy when others are fearful.

    By | 2020-03-27T15:32:51+00:00 5th November, 2013|Insights|

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