Can Contrarian Investing Pay Off? What To Know About This Warren Buffett-Approved Strategy
Investors trying to decide how to invest their money have any number of strategies to choose from. But if you want to go against the herd mentality, contrarian investing might be the one for you — if you have the rigor and patience it takes to pull this strategy off.
Check Out: I’m a Self-Made Millionaire: 5 Stocks You Shouldn’t Sell
For You: 6 Genius Things All Wealthy People Do With Their Money
Contrarian investing is betting against the obvious, taking a skeptical approach that might not be the most popular at any given time. Or, as Morningstar puts it, it’s “the practice of buying assets that are out of favor with the expectation that they will rebound.”
One of the most famous investors and an aficionado of the contrarian strategy is none other than billionaire investor and Berkshire Hathaway chairman and CEO Warren Buffett.
The Oracle of Omaha, who still adheres to his motto that holding steady and being patient are key to successful investing, is also known for the contrarian views he has taken throughout his career.
One famous quote of his, from his 1986 letter to Berkshire Hathaway shareholders, sums up his contrarian stance: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
This quote has been reiterated countless times by Buffett, including in his 2004 letter to shareholders.
As he explained in that letter, “Over the 35 years [since the 1960s], American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead, many investors have had experiences ranging from mediocre to disastrous.”
He added, “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.” In other words, don’t chase winners.
Another example is his refusal to follow investing fads — something he has clearly stated with his dislike of cryptocurrency.
Can Contrarian Investing Pay Off?
For Buffett, contrarian investing certainly has paid off — although that’s not the only strategy he uses.
Indeed, Berkshire Hathaway released record profits In February, reporting a $37.4 billion full-year operating profit, with the conglomerate now sitting on an all-time high of $167.6 billion in cash and equivalents, as GOBankingRates previously reported.
In terms of the advantages of a contrarian investing strategy, The Motley Fool noted, “Your portfolio is more likely to outperform the market on a long-term basis as a contrarian investor.”
When it comes to the disadvantages of the strategy, The Motley Fool underscored the fact that sticking with a specific investment amid negative general sentiment about it can be emotionally exhausting.
Contrarian investing entails a lot of rigor and resilience as you conduct your due diligence research and prepare to stay the course over the long term. “It’s a practice that takes years to master and an investing style that can be easily derailed by the influence of short-term noise,” The Motley Fool noted.
More From GOBankingRates
This article originally appeared on GOBankingRates.com: Can Contrarian Investing Pay Off? What To Know About This Warren Buffett-Approved Strategy
