Is it safer to take contrarian position in stock market? In one of the Dilbert comics, the supposed technology prima donna will keep putting down all the ideas. He will justify his tactics thus... People will forget your wrong predictions on things that everyone got right. However, when any of the ideas expected to be right go wrong, you will be remembered as a genius who predicted the right wrong right. When I first heard of holding a contrarian view in the market, I thought on the lines of Dilbert's prima donna. On further reading, I realised that my understanding is incorrect.
In value investing, contrarian position is to pick good stocks that crowd deemed worthless. The success of such a method of investment is glaringly obvious. isn't it? Pick cheaper stocks and reap the benefits when it surpasses everyone's expectation. Is it as simple as it sounds? Definitely no.
The golden standard of stock market investment, Berkshire Hathaway, has utmost one great idea per year (as per Charlie Munger). Now, we must imagine our expected hit rate. Good news is that we don't need many great ideas in our life time. We need to invest a lot of time and patience in identifying rare good stocks and keep faith in them against market noise. If we can do this, we can emerge victorious.
Stock market is often compared to Pari mutuel system. Here is an excellent write-up on it. Given the huge house commission costs of pari mutuel betting system, even with good analysis it is difficult to avoid losses. The only people who successfully beat it are the ones who wait for the mispriced gambles and bet on it. Of course, stock market doesn't have huge transaction costs. Still the lessons from pari-mutuel-system is applicable for stock market.
WAIT FOR THE MISPRICED GAMBLE.
In value investing, contrarian position is to pick good stocks that crowd deemed worthless. The success of such a method of investment is glaringly obvious. isn't it? Pick cheaper stocks and reap the benefits when it surpasses everyone's expectation. Is it as simple as it sounds? Definitely no.
The golden standard of stock market investment, Berkshire Hathaway, has utmost one great idea per year (as per Charlie Munger). Now, we must imagine our expected hit rate. Good news is that we don't need many great ideas in our life time. We need to invest a lot of time and patience in identifying rare good stocks and keep faith in them against market noise. If we can do this, we can emerge victorious.
Stock market is often compared to Pari mutuel system. Here is an excellent write-up on it. Given the huge house commission costs of pari mutuel betting system, even with good analysis it is difficult to avoid losses. The only people who successfully beat it are the ones who wait for the mispriced gambles and bet on it. Of course, stock market doesn't have huge transaction costs. Still the lessons from pari-mutuel-system is applicable for stock market.
WAIT FOR THE MISPRICED GAMBLE.
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