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Contrarian investing is a strategy that involves making investments based on factors other than market trends, projections based on past performance, and current industry indicators. Essentially, contrarian investing is choosing to make an investment that would generally be considered to run counter to the usual procedures of investing. This high risk mode of investing is usually entered into with the idea of getting in on a good deal before the rest of the investment world notices.
While on the surface contrarian investing appears to be based more on instinct than factual information, this is rarely the case. Investors who wish to speculate in high risk ventures of this nature usually try to zero in on investment opportunities that are overlooked by others. For example, the contrarian investor may choose to focus on an industry that is not in favor right now, and make an investment in a company within that industry that is stable and doing very well. By choosing to invest in overlooked businesses that are part of an unpopular market sector, the investor stands a good chance of making a significant return on the investment while facing little to no competition for acquiring stocks.
Contrarian investing can take place in both a bull market and a bear market. The key for the investor who employs this strategy is to know when to anticipate a bubble in the market and make arrangements to sell, while at the same time choosing to buy during periods when the market is characterized by a high level of pessimism. This is going against the grain of the market and can be very risky. At the same time, the rewards can be significant.
The concept of investing in opposition by buying out-of-favor stocks usually entails careful research into what the majority of investors are doing and then choosing to look for areas of the market that are being neglected. Once these areas are identified and evaluated, it is possible to determine if there is a significant chance of making a profit by going in the opposite direction of most of the current market indicators. Far from relying on instinct alone, contrarian investing requires the application of logic, gathering of facts, and carefully weighing the chance of return against the potential for risk.