Have you ever wondered why some people are able to invest in any financial instrument or property at a low price and why you have always missed the boat? This article explains the importance of understanding why contrarian investing works and how having such a mindset can help you make more money as part of a larger investment strategy.
1. Value Investing mindset
Before one can profess to be a contrarian investor, you must have an understanding of the underlying value of the thing you are buying and decide that it is undervalued and historically and the market will rebound within a good period. A good book to start reading on value investing in the stock market is “The Intelligent Investor”, by Benjamin Graham who was Warren Buffets’ Professor in Columbia University and helped shape his investment strategy. So because you know the usual market value of something, you can purchase it on the cheap when prices drop , not unlike shopping for discounts at a supermarket.
2. Look out for downturns
Another key indicator is to understand your market well and then pay a careful attention to downturns in the economy or freak incidents like September 11. Some investments do down in value due to macro economic factors that may have nothing to do with your particular investment. A contrarian investor would spend time looking for ominous signs in the papers which may lead to a downturn so as to purchase stocks, shares at a discount to the average price.
Downturns that can prove profitable include:
• Natural Disasters that have nothing to do with the underlying stock.
• Cross Border Disputes affecting a particular Company’s price which has nothing to do with its main operations.
• Wars and Hostilities that can affect the competitors of your current favourite stock.
3. Look out for excessive exuberance
Contrarian Investors know that downturns can also be profitable if you use Put options which pay you when the underlying stock declines in price? The best way to predict such a downturn would be to look for in the words of the former Chief of the Federal Reserve Allen Greenspan, “excessive exuberance”. This means basically that while prices are still rising furiously, the number of buyers would start decreasing and a market correction might follow.
Some indicators of such excessive exuberance include:
• When you see financial analysts being very rosy on highly speculative stocks.
• When the stock market indexes start rising close to record highs.
• When you notice that trading volume diverges with the price, meaning that while prices are rising, the trading volume is dropping.
Contrarian investing is thus a mindset where the individual looks for trading opportunities which can yield profits. A contrarian investor thus looks out for economic, political and other factors which can cause a large market movement in the particular financial instrument that he is trading in and can make a large capital gain from his investment. This form of investing can be part of a larger investment strategy and one should consider contrarian investing as part of his online investing warchest today.
Copyright © 2006 Joel Teo. All rights reserved.
Posts Tagged ‘Financial Instrument’
Investment Strategy: Contrarian Investing 101
December 31st, 2009What Is Online Paper Trading?
December 14th, 2009Online paper trading occurs when investors make use of paper credits to engage in live trading on markets such as the foreign exchange markets. These paper credits are mere tokens and are used in place of real money to give the investor a feel on how trading would be like with real money. Many online investment platforms offer investors a demo account, allowing them to engage in online paper trading. Losses and gains are negligible given the fact that the credits used for such trades are merely for simulation purposes. Yet, the usefulness of online paper trading is aplenty. Novices and veterans of trading can greatly benefit from the use of online paper trading. - Online Paper Trading Benefits For Beginners The fact that such trades do not require any real capital outlay means that they would be very much suitable for beginners who are learning the ropes of trading in a particular financial instrument. Online paper trading allows these novices to familiarize themselves with the various features of the real platform. These include the limit and stop loss functions, which are instrumental to a trader’s success. It would also allow beginners in the world of trading to develop healthy habits necessary for success in investing such as finding out more about the factors affecting currency movements before hitting the “buy” button. This is critical as most people tend to have the wrong mindset of treating the Forex market like a casino. Yet, in reality, it is these people who would often pay dearly as a result of their folly. - Online Paper Trading Benefits For Seasoned Traders For the seasoned trader, online paper trading provides a useful avenue to put untried trading methods to the test. Feel that you have developed a method for greater trading success? Try it out on a demo account. With paper credits, you only stand to gain as you would be able to evaluate the effectiveness of your strategy from a safe distance, without suffering from horrible losses should things go awry. The fact is, even professional investors make use of online paper trading as a means to refine their trading strategies and develop skills for greater returns on their investments. - Bringing The Learning Of Paper Trades To Real Trades In any case, it is important for one to adopt the right mentality in order to derive the most out of online paper trading. It simply would not help if you tell yourself that you are only using “false money” which would allow you to take reckless risks when making a trading decision. The key to investing is to take calculated risks, not reckless risks. Online paper trading allows you to try out strategies which are based on calculated risk, to enable you to improve the odds of success of the method which you are trading with. Online paper trading will take you further if you are willing to put in that added commitment of constantly evaluating your online paper trades. This would allow you to learn fast, to enable you to develop sophisticated investing strategies over time without risking your neck. Online paper trading provides a useful tool for investment success. Be it the novice or seasoned trader, the ability to make good use of online paper trading as a learning tool would definitely guarantee you success and high returns in your investments.
