Contrarian investing and what it is

What is contrarian investing?

Contrarian investing refers to a strategy of investing in which the investors go against the trends that are followed by the majority. Contrarian investors buy or sell shares when the majority of investors are doing the opposite. Typically, the investors who engage in contrarian investing do so with a long-term view.

This strategy can be used with stocks, with an entire industry sector, or with bull markets or bear markets. A bear market occurs when there is a downward trend in the market that lasts for a longer time period than a stock market correction. By contrast, a bear market occurs when the market continues to climb.

Who are some famous contrarian investors?

There are several famous investors who have engaged in the practice of contrarian investing. Warren Buffet says that the opportune period to invest in a stock occurs when the market trends have caused the price to drop. He says that people should “be greedy when others are fearful”.

David Dreman, publisher of Contrarian Investment Strategies: The Next Generation, thinks that investors exaggerate because of the influence of media. This causes popular stocks to be overpriced while the earnings of lower-value stocks are underestimated. This causes limited upward prices and sharp falls for stocks that are on fire, opening up the opportunity for investors to pick up undervalued stocks to add to their asset class mixes.

Michael Burry determined that the subprime market was incorrectly priced and overly emotional. Burry owned Scion Capital, which shorted and profited from the subprime mortgage market. The Big Short was written by Michael Lewis and has been made into a movie that documents this contrarian investing move.

See articles on contrarian investing and how contrarian investors think at M1 Finance

Financial markets statistics, U.S. investors

Between 2008 and 2016, the percentage of Americans who were invested in the stock market fell from 62% to 52%. Among people who are currently invested in the stock market, 50% have less than $40,000 invested in their asset class mixes.

Among people who are not invested in the stock market, 21% say that they do not trust brokers while 53% state that they do not have money available to invest. For 90% of U.S. households, a market shift of 10%, which is enough to signal a market correction, their wealth holdings would only have an impact of 1% to 2%.

What type of investor is a contrarian?

Investors who tend to be contrarian in their investment choices tend to thoroughly research the companies and their fundamentals. The companies that are chosen tend to have solid reputations and stable profit margins.

Contrarian investing does not follow a bull market or bear market view. They believe that the value of an investment is below its intrinsic value. As such, they view the investment as presenting an opportunity to make a profit. Instead of investing only during bull markets, these types of investors invest whenever a stock is undervalued.

Contrarian methods

There are several methods that are used for contrarian investing. These investors typically have strong research skills and choose companies that are heavily financed, are undervalued for the wrong reasons, and that have good profit margins.

The price to earnings ratio is factored in, but the P/E ratio is not the only thing that is considered. You should look for stocks that have a low price to earnings ratio or P/E ratio.

The price to earnings ratio or P/E ratio measures a stock’s current price compared to its earnings per share. The P/E ratio is determined by multiplying the share price by the number of fully diluted shares that are outstanding. Then, you divide the product by the sum of what the company has earned over the past four quarters to determine the price to earnings ratio of the stock.

You should identify when movements are exaggerated, which is when they extend past a sensible point. The market tends to focus on the short-term because of overreaction that causes an exaggeration in the amounts of price increases and decreases. This allows knowledgeable investors to profit.

Contrarian investing involves buying when others are selling and selling when others are buying. Contrarians typically purchase low-valued securities called dogs and sell hot securities that other people want. They do not pay attention to whether the market is a bear or bull market.

Checkout contrarian investing and how contrarian investors think at M1 Finance

A recession can offer a great opportunity to invest if you are an adept investor who is able to hold a long position and who is able to spot behavioral market trends. If you identify a stock that is undervalued but that you expect to boom in the future, you can invest in it. This is called trend investing and involves buying a stock before it trends upward and then riding the trend up before you sell.

The major factor is determining which stocks to buy and sell after the stocks recover. The key is taking a long-term view of your investments. This helps to minimize the impact of the volatility that is caused by short-term market swings.

How to think like a contrarian

To think like a contrarian, you can do several things. To figure out high volatility periods, look at indices such as the Chicago Board Options Exchange Volatility Index or VIX. Figuring out periods of high volatility that result from the emotional exaggeration of market participants can open up favorable buying opportunities.

Identify high trading volumes, which indicate investor interest and a possibility that a stock is overvalued. Instead of investing in these types of high-volume stocks, look for stocks that are undervalued. Another potential indicator of mispricing of a stock is a high level of investor interest.

Some indicators that you should look for in stocks when contrarian investing include the following:

  • Low price to earnings ratio
  • Low price to cash flow
  • Low price to book
  • Low price to dividend

The bottom 20% of the market is the focus. Other factors that you should consider include the following:

  • Low payout ratios
  • High return on equity
  • Higher than average dividend yield
  • Pre-tax profit margins of a minimum of 8%

Purchase stocks that are rated as a sell, and hold onto them until their prices improve. When their prices improve, sell them then. Sell stocks that have been downgraded by analysts. Since these stocks are usually behind the trends of the market, look for expert opinions on the stocks before including them in your list.

Look for short-selling. This occurs when borrowed shares are immediately sold with the intention of purchasing them at a lower price to return them to the lender and profit off of the difference. The short-interest ratio should be used in this analysis. Normally, stocks have a rating of five or less. This means that you should aim for ratios of six or higher. This is a method that is typically only used by savvy investors.

Look for large institution interest in which the ownership is more than 65%. The absolute minimum is 50% ownership. The idea behind this is to have institutional investors driving up the price.

Finally, you must be ahead of the financial news. Once it hits, your opportunity may already have passed.

Value investing vs contrarian investing

There are some similarities between contrarian investing and value investing. Warren Buffet engages in value investing, which is an investment strategy in which the stocks that are chosen appear to be trading for less than their intrinsic values.

When investors follow the value investing theory, they try to identify undervalued stocks and then purchase them. To be a value investor, look for the following in stocks:

  • Below average price-to-book ratios
  • Lower than average price to earnings or P/E ratios
  • Higher than average dividend yields

The approach that Warren Buffet uses is that the market tends to overreact to financial news. This causes the stock price movements in the short term to not be related to a company’s fundamentals in the long-term.

Both strategies look for undervalued securities based on the investors’ reading of the current market trends. Both types of investors look for stock share prices that are lower than the intrinsic value of the company.

Get information on contrarian investing and how contrarian investors think at M1 Finance

The Dogs of the Dow

The phrase “dogs of the Dow” originated in 1991 in Michael B. O’Higgin’s book, “Beating the Dow.” It is a value investing strategy that was created to perform as closely as possible to the Dow. It is a long-term, conservative dividend strategy that encourages you to invest in the 10 highest dividend-yielding, blue-chip stocks that are listed in the Dow Jones Industrial Average each year.

The Dow Jones Industrial Average or DJIA is an index that tracks 30 large, publicly-owned companies trading on the New York Stock Exchange or NYSE and the NASDAQ. The DJIA was created in 1896 by Charles Dow and Edward Jones.

High yield dividend stocks are stocks that pay relatively high dividends and that have relatively low stock prices. Blue-chip companies are those that have market valuations of $10 billion or more. These companies also have solid growth histories and future potentials, are listed in major market indexes, and typically pay out dividends.

The dogs of the DOW strategy has outperformed the markets for the past four years and for seven out of the last 10 years. To implement this strategy, look at the DJIA on the last day of the year and choose the 10 high yield dividend stocks that are the highest. In the new year, invest the same dollar amount in each of the stocks on the first trading day of the year. Keep your original portfolio for the year. At the beginning of each subsequent year, repeat the process.

Investors add this type of contrarian mindset into their diversified portfolios because they hope to have a growing return that adds value over the long term.

Contrarian investing is an investment strategy that might help you to build your wealth faster if you are a savvy investor. M1 Finance may help you to build wealth even if you are new to investing and are relatively unfamiliar with this investment strategy.

Learn about contrarian investing and how contrarian investors think at M1 Finance

M1 Finance can help to build your wealth

M1 Finance is an online brokerage that helps you to understand different how to invest during bear markets and bull markets. When you invest with M1 Finance, you can enjoy simple and secure investing that is free. M1 Finance does not charge commissions or management fees, allowing your investments to grow faster.

In addition to investment accounts, M1 also offers a simple, low-cost way to borrow money with M1 Borrow. This is a portfolio line of credit that allows you to borrow on the margin for up to 35% of your portfolio’s value. You can then repay the loan at a low rate of interest on the schedule that you choose.

You can use M1 Borrow to pay off your expensive debt. When you use M1 Borrow, it has greater tax deductibility than most home equity lines of credit. If you have a qualifying account with $10,000 or more, you can instantly access the money without filling out extra paperwork, dealing with loan officers, or submitting to credit checks.

Customize your own account with M1 Finance

When you open an account with M1 Finance, you can pick investments in an asset class mix that you prefer and that match your ability to tolerate risk. Do-it-yourself investors can enjoy simple, free, and secure investing with M1. You can start investing for free and can invest in the asset class or classes of your choice without compromise.

M1 Finance allows everyone to enjoy free and automated investing without charging trading fees or commissions. The brokerage teaches you how to manage your money so that you can earn more. The investing process at M1 Finance is automated, which makes good financial habits effortless. Every penny that you invest will be put to work for you so that you can enjoy better returns. To learn more about value, trend, and contrarian investing, you can get started investing today by filling out an account application or call M1 Financing at 312-600-2883.



Check the background of M1 Finance LLC on FINRA's BrokerCheck



By using this website, you accept our  Terms of Use  and  Privacy Policy  and acknowledge receipt of all disclosures in our  Disclosure Library . All agreements are available in our  Agreement Library. M1 relies on information from various sources believed to be reliable, including clients and third parties, but cannot guarantee the accuracy and completeness of that information. M1 refers to M1 Holdings Inc., and its affiliates. M1 Holdings is a technology company offering a range of financial products and services through its wholly-owned, separate but affiliated operating subsidiaries, M1 Finance LLC and M1 Spend LLC.

Brokerage products and services offered by M1 Finance LLC, an SEC registered broker-dealer and Member  FINRA /  SIPC.

Brokerage products are: Not FDIC Insured • No Bank Guarantee • May Lose Value

All investing involves risk, including the risk of losing the money you invest, and past performance does not guarantee future performance. Borrowing on margin can add to these risks, and you should  learn more  before borrowing. Nothing in this informational site is an offer, solicitation of an offer, or advice to buy or sell any security and you are encouraged to consult your personal investment, legal, and tax advisors.


M1 Spend checking accounts furnished by Lincoln Savings Bank, Member FDIC. M1 VisaTM Debit Card is issued by Lincoln Savings Bank, Member FDIC.

No minimum balance to open account. No minimum balance to obtain APY (annual percentage yield). APY valid from account opening. Fees may reduce earnings. Rates may vary.

All product and company names are trademarks™ or registered® trademarks of their respective holders. Use of them does not imply any affiliation with or endorsement by them.
Address: 213 W Institute Pl, Ste. 301, Chicago, IL 60610

© Copyright 2019 M1 Holdings Inc.