WHEN YOU SEE BLOOD, SEIZE THE MOMENT
When you see "red" in the Wall Street, capitalize on it. British nobleman and Rothschild banking family member Baron Rothschild once said, "Buy when there's blood in the streets, even if the blood is your own."
That is the essence of contrarian investing. If you believe worse things take place in the market, go against the flow. Buy assets that perform poorly and sell when they perform well. Be bullish when they are bearish, and vice versa. Most investors only want winners in their portfolio. But seasoned investor Warren Buffett advised against following a cheery consensus, saying it is not a feasible investment decision.
Contrarians basically takes the opposite direction. They get excited when an otherwise good corporation has a sharp, unmerited plunge in share price. These investors go against the flow and presume the market is normally wrong at its lowest lows and highest highs. As the prices swing more, the rest of the market becomes more misguided.
Some contrarians have made their best investments during times of market turmoil.
Sir John templeton sold the Templeton Growth Fund. A pioneer of international investing, the contrarian investor was purchasing into companies and countries when they reach the point of maximum pessimism. In 1939, at the beginning of World War II, he bought shares of each European firm, in which most were bankrupt. Four years after, he sold the stakes for a very huge profit.
The business magnate, in the 1973-1974 bear market, purchased a stake in the Washington Post Company. Buffett said he acquired those shares at a deep discount, as the firm could have sold its assets to any one of 10 acquirers for not lower than $400 million, perhaps more. At that time, the company had only a market cap of $80 million. This venture has subsequently increased by over 100 times the purchase price, before dividends.
Following the September 11 attacks, Boeing’s stock did not bottom until about a year after that assault. Market sentiment about the airline industry became sour for a certain period of time after the terrorist attacks. But those who speculate the airline would survive reaped hefty rewards. Its shares soared more than four times in value over the next five years.
Kmart filed for bankruptcy protection in 2002. Before and after the incident, Third Avenue Value Fund manager Marty Whitman purchased Kmart bonds and only paid around 20 cents on the dollar for the bonds. Whitman was elated when he found out the firm recuperated from the bankruptcy. The bonds were exchanged for stock in the new company. Kmart shares leaped much higher in the years after the reorganization before Sears acquired the company. As a result, the fund has generated a return of 14.3% since its inception in 1990.
Before you employ contrarian investing, do your own due diligence. Do not take the other side right away. For instance, if the stock plummets, find out the factors that aggravate the downfall and whether the decline is justifiable or not.
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