Contrarian Investing
The investment strategy of buying assets that are out of favor or undervalued because of widespread pessimism, and selling when optimism pushes prices too high.
Contrarian Investing
"Be fearful when others are greedy, and greedy when others are fearful." — warren-buffett
Contrarian investing is the discipline of buying what others hate and selling what others love. It requires independent thinking, conviction, and the ability to withstand social pressure.
The Logic
Markets are driven by human emotions — fear and greed — which are inherently cyclical. When:
- Everyone is optimistic → Prices exceed intrinsic value → Overpriced
- Everyone is pessimistic → Prices fall below intrinsic value → Underpriced
Contrarians systematically exploit these extremes.
The Contrarian vs. Crowd Problem
"Being right when others are wrong — that's the essence of contrarian investing." — warren-buffett
The challenge: Being contrarian isn't enough. You must be:
- Correctly contrarian (the asset is undervalued)
- Early (others eventually see it too)
- Willing to endure (the crowd can stay wrong longer than you can stay solvent)
Famous Contrarian Moves
Buffett in 2008
In letter-2008, Buffett explained his crisis investments:
"Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."
While the world was panic-selling, Buffett was writing $8B checks to Goldman Sachs and GE at distressed prices.
Munger on Being Contrarian
"I think the people who are contrary to the current wisdom make all the great fortunes." — charlie-munger
The airlines mistake
In letter-2020, Buffett revealed he was wrong about airlines — he bought them in the crisis, then sold at the bottom (ironically, one of his few contrarian failures).
The Contrarian Checklist
Before going against the crowd, ask:
| Question | Why It Matters |
|---|---|
| Is the pessimism warranted? | Sometimes businesses deserve to be hated |
| Is the stock cheap relative to value? | Being contrarian at $10/share is different than at $5 |
| What's the catalyst? | You need a reason for the crowd to change |
| Can you survive being wrong? | Position sizing is critical |
| How long is your time horizon? | Crowds can stay irrational indefinitely |
The Difference Between Contrarian and Contrary
| Contrarian | Contrary |
|---|---|
| Buys when others fear | Does the opposite of everything |
| Based on fundamental analysis | Based on contrarianism itself |
| Calculated risk | Arbitrary contrariness |
| Often right | Often just annoying |
When Contrarianism Fails
The Value Trap
Sometimes a stock is cheap for good reason — the business is declining. Being contrarian doesn't make a dying business good.
Early Death
You can be right but too early. As charlie-munger says: "The market can remain irrational longer than you can remain solvent."
Social Pressure
When your friends, family, and financial media all say you're wrong, conviction is hard to maintain.
Famous Contrarian Examples
See's Candies (1972)
Buffett bought See's for 16x earnings when "everyone knew" candy businesses were mediocre. See's has since earned billions.
Washington Post (1974)
Buffett bought Washington Post at ~25% of book value during the Watergate crisis. The stock subsequently 100x'd.
Salomon Brothers (1987)
Buffett invested in Salomon after a scandal, when everyone was fleeing. Eventually recovered.
Bank of America (2011)
During the euro crisis, Buffett invested $5B in Bank of America at distressed prices. Profited enormously.
The Relationship to Mr. Market
mr-market is the mechanism that creates contrarian opportunities. When Mr. Market's depression creates absurdly low prices, the contrarian buys. When his euphoria creates bubbles, the contrarian sells.
Famous Quotes
"You can't make a good deal with a bad person." — warren-buffett (on the importance of character in contrarian bets)
"The speculative market is filled with talented people who underperform because they are trading against their own convictions." — Howard Marks
The Key to Contrarian Success
- Independence of thought — Not just disagreeing, but being right
- Fundamental analysis — Know the difference between cheap and worthless
- Conviction — Once you've decided, don't waver
- Patience — May take years for the crowd to catch up
- Position sizing — Don't bet the farm on one contrarian call
Related
- warren-buffett — Master contrarian
- mr-market — The source of contrarian opportunities
- margin-of-safety — The protection when contrarian bets go wrong
- long-term-thinking — The time horizon contrarians need
- behavioral-bias — Why crowds become irrational in the first place