One of the important aspects that help investors outperform the crowd is ‘contrarian thinking’. All successful long term value investors have facets of this quality which have helped in significantly outperforming markets and crowds. If I have to explain this through the poison curve; we need to be in the extremes rather than in the majority.
Investing is a game of opportunities and probabilities and profits are a resultant of being right and avoiding big mistakes.
What does contrarian thinking mean in the market context? The explanations are swimming against the tide or being greedy when others are fearful and vice-versa or making more money than the crowd and losing lesser than the crowd. All this feels like the right approach to investing but how can we all incorporate this in our investment approach. Being contrarian is more a mindset that one more cultivate and this can be stretched to life 'beyond investing'.
I recommend three simple approaches that will help you gain this mindset and observe when your thinking is following the crowd.
1. Avoid the noise
By noise I refer to 'distractions'. These come from multiple sources (TV Channels, Social Media, Research reports, watsapp groups among many others. These noises force us to react and over-trade when all one needs to do is keep calm and be on the lookout. Unfortunately we tend to spend too much time creating and spreading the noise which refrains us from thinking independently and focusing on the controllable (which are usually only few!).
2. Know the cycles
All companies follow a cycle of performance. These cycles are either driven by external forces (like commodity prices, weather, government policies etc) and company factors (like management changes, product launches, mergers & acquisitions, debt restructuring etc. All these factors cause resultant prices to move up or downwards and catching them at the 'right' time up or down could be beneficial.
3. Ask yourself 'why' are your right or wrong
We all like to be correct with our perspectives, predictions and views. This coupled with confirmation bias results in us reading and following views that confirm our thinking. Effective thinking would be to ask why is it wrong and why we must not listen to our confirmation bias. Reading sell reports of stocks you own are an excellent way to start!
In the investment business, avoiding the pitfalls or unforced errors is as important in a game of average players. Happy Investing !!!
Investing is a game of opportunities and probabilities and profits are a resultant of being right and avoiding big mistakes.
What does contrarian thinking mean in the market context? The explanations are swimming against the tide or being greedy when others are fearful and vice-versa or making more money than the crowd and losing lesser than the crowd. All this feels like the right approach to investing but how can we all incorporate this in our investment approach. Being contrarian is more a mindset that one more cultivate and this can be stretched to life 'beyond investing'.
I recommend three simple approaches that will help you gain this mindset and observe when your thinking is following the crowd.
1. Avoid the noise
By noise I refer to 'distractions'. These come from multiple sources (TV Channels, Social Media, Research reports, watsapp groups among many others. These noises force us to react and over-trade when all one needs to do is keep calm and be on the lookout. Unfortunately we tend to spend too much time creating and spreading the noise which refrains us from thinking independently and focusing on the controllable (which are usually only few!).
2. Know the cycles
All companies follow a cycle of performance. These cycles are either driven by external forces (like commodity prices, weather, government policies etc) and company factors (like management changes, product launches, mergers & acquisitions, debt restructuring etc. All these factors cause resultant prices to move up or downwards and catching them at the 'right' time up or down could be beneficial.
3. Ask yourself 'why' are your right or wrong
We all like to be correct with our perspectives, predictions and views. This coupled with confirmation bias results in us reading and following views that confirm our thinking. Effective thinking would be to ask why is it wrong and why we must not listen to our confirmation bias. Reading sell reports of stocks you own are an excellent way to start!
In the investment business, avoiding the pitfalls or unforced errors is as important in a game of average players. Happy Investing !!!
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