Why Should One Be Contrarian?
Contrarian Investor : You’ve always heard that sometimes one should take a contrarian approach to investing by contrarian basically what one means is to look at sectors which are out of favor currently in the market and to also focus on sectors which are currently in favor and therefore heavily in the portfolio of investors.
Now Why Is It Important To Be Contrarian :
Yeah the first and most important reason is to basically recognize that most industries are cyclical in nature they go through good times and they go through bad times.
When stocks are out of favor they’re usually going through a cyclical downturn which also implies that at the end of the downturn the stocks will move up once again and therefore smart long-term investors must always keep an eye on sectors and stocks where there is complete pessimism in the market and very low ownership.
But the two benefits of being contrarian primary benefits
But the two benefits of being contrarian primary benefits are a that it usually ends up in bringing your overall portfolio valuation down because when you buy fancied sectors which are in favor you’re essentially buying stocks at much higher key multiples and when you buy stocks which are out of favor or under owned sectors you’re buying stocks at much lower P multiples compared to their historical standards and therefore by owning them or some of them you bring down the overall valuation level of your portfolio.
It deal escs you from owning very highly owned popular fancied stocks because at some point these stocks and sectors will also start a correction of their own and if you own only these stocks chances are that your portfolio will correct significantly in terms of price. These are the various reasons why it always works to keep some kind of a contrarian approach while looking at your portfolio.
How Should One Be Contrarian?
The way to be contrarian is to always be alert to certain kind of phenomenon in the market when you’re in the market you always know which sectors nobody wants to buy and there are many ways to figure out why and how that is true.
- If you look at mutual funds or you look at individual portfolios of people the commentary around it is easy to spot which sectors are not owned by people a very low of ownership is usually a good sign that this should be on on your contrary and radar. The other thing is that the waiting’s of these sectors which are out of favor actually tend to be very low in the key indices that they belong to so.
For Example: right now if you look at the nifty and the Sensex the sector’s which have very low weight age are pharmaceuticals or telecom. These are sectors which are completely out of favor now this is not a case to buy them but it certainly is a case for them appearing on your contrarian radar that these are sectors where the weightages have diminished significantly compared to their historical weightages in the index and therefore one should look at it carefully.
Equally equally importantly one should look at sectors where the weightages have become very large and if you look at at the height of the IT boom the IT waited in the index Sansex, Nifty and BankNifty had become disproportionately large today the weight edge of financials banks is disproportionately large and that should be a contrarian warning bell that at some point there is a risk of an accident.
So both for expensive and popular sectors and for inexpensive and under owned and under life sectors these are the usual ways to spot whether a sector should come into you’re under into your contrary on radar.
Should one then avoid all consensus Favourites ?
This is a common mistake curve when people think of contrarian investing they often say that they should shun what other people are buying or what is popular choice of sectors completely that is not always true. you will find that at any point in time a certain kind of stocks always find their way into most smart portfolios a long-term portfolios.
one reason could be that some sectors in this country are fairly secular in nature and not so cyclical so some of these private banks consumption kind of stories they are not that deeply cyclical as some other sectors like maybe metals or autos or chemicals those kind of sectors and therefore one should make a certain allowance for more secular nature where growth has been consistent for a very long period of time.
It’s not necessary that those sectors being popular less it means that you should throw them out of your portfolio, but having said that one should be very careful of actually only owning stocks which are very popular in nature.
The thing to keep in mind is that even the crowd is right for some length of time so if the crowd owns something then you can own it but when the crowd owns a lot of something you must also recognize that the risks of that sector are going up with every passing quarter as long as you’re cognizant of that risks it may not be such a bad idea to also participate in some of the sectors and stocks which are owned which are consensus popular traits.
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