What Is Contrarian Investing?

Investing can often feel like a popularity contest. If everyone is flocking to the latest hot stock, it seems like a sure bet, right? Well, sometimes that’s the case. And that’s why a lot of folks will remind you that the trend is your friend. But it’s not necessarily always true. And that’s why contrarian investing is both difficult and lucrative. You see, the contrarian investor looks at the herd, shrugs, and heads in the opposite direction.

Contrarian investing is all about going against the grain. It’s about making moves that seem downright bizarre at the time but that often pay off handsomely in the long run. It’s a strategy that’s based on one simple idea: When everyone is thinking the same thing, it’s time to start questioning it. So today let’s dive into what contrarian investing really is and explore some real-world examples where those bold enough to zig when everyone else zagged came out on top.

What Is Contrarian Investing, and Why Does It Work?

Contrarian investing is, at its core, a philosophy of buying when others are selling and selling when others are buying. The idea is that markets tend to overreact, whether out of fear or greed. When people panic and dump stocks, prices drop to levels that may not reflect the true value of the asset.

Conversely, when euphoria takes over, prices often soar to unsustainable heights. The contrarian investor steps in during these periods of irrational behavior, snapping up undervalued assets or getting out before the bubble bursts.

The key to successful contrarian investing is patience. It often means being in the minority for a while, watching everyone else chase shiny objects while you sit tight with your seemingly “boring” investments. But the payoff comes when the market inevitably shifts back toward rationality.

Contrarians aren’t just betting against the crowd; they’re leading it by betting on a return to fundamentals. And when that happens, it can lead to substantial profits…

Contrarian Investing: When Lumps of Coal Make the Best Presents

Let’s start with an unlikely winner: coal. Earlier this decade, coal was practically a dirty word in investing circles. With the rise of renewable energy, the increasing pressure for companies to adopt green practices, and the perception that coal was yesterday’s fuel, most investors were fleeing coal stocks.

Many analysts and media outlets declared the sector “dead money.” But a small group of contrarian investors saw things differently.

Despite the growing trend toward clean energy, the demand for coal in certain parts of the world remained strong. Countries like China and India continue to rely on coal for energy production. Contrarians who invested in coal companies like Alliance Resource Partners (NYSE: ARLP) and Peabody Energy (NYSE: BTU) at rock-bottom prices saw impressive gains when the industry didn’t collapse like everyone said it would.

Their willingness to hold firm when everyone else was selling allowed them to ride out the storm and enjoy a major comeback, defying the media narrative. But that’s far from the first time contrarian investing paid off in a big way…

Contrarian Investing: The Big Short

Perhaps the most famous example of contrarian investing is the story made popular by the movie The Big Short. In the mid-2000s, everyone seemed to believe that housing prices would only go up. Banks were handing out risky mortgages like candy, and the housing market was booming.

It seemed like the perfect, risk-free bet, right? Not so fast. A handful of contrarian investors, including Michael Burry and Steve Eisman, took a closer look and realized something was terribly wrong.

They discovered that the housing market was built on a foundation of subprime mortgages that were likely to default. While the rest of the world was still bullish, these investors placed their bets against the housing market by shorting mortgage-backed securities.

Their strategy was met with skepticism, ridicule, and even hostility. But when the market finally crashed in 2008, these contrarians reaped enormous rewards. It was a textbook case of contrarian investing. They went against the crowd and they won BIG.

Contrarian Investing: Flipping Tech for Gold in the 1990s

In the late 1990s, tech stocks were all the rage. The internet was booming and investors couldn’t throw their money at tech companies fast enough. Stocks like Microsoft, Cisco, and Amazon were reaching dizzying heights, and everyone wanted a piece of the action.

Amid this tech-fueled mania, a group of contrarian investors quietly moved their money into a completely different asset class — gold and precious metals. While tech stocks were soaring, gold was languishing, seen as an outdated and unexciting investment.

But these contrarian investors had a hunch. They believed that the tech bubble would eventually burst, and when it did, investors would rush to the safety of gold. And they were right.

When the dot-com bubble burst in 2000, tech stocks crashed hard, wiping out billions of dollars in wealth. Meanwhile, gold and precious metals began to climb as investors sought stability in the chaos. Those who had the foresight to move away from tech and into gold were rewarded for their discipline and foresight.

The Bottom Line: Contrarian Investing Isn’t Easy, but It’s Often Profitable

Contrarian investing is not for the faint of heart. It requires a thick skin, a lot of patience, and the willingness to stand alone, often for long stretches of time. It also demands deep research and the ability to see through market noise.

But as the examples of coal in the 2020s, the housing market collapse in 2008, and the dot-com bubble in the late 1990s show, going against the grain can lead to massive rewards.

If you’re willing to put in the work and trust your instincts when others are panicking or celebrating too soon, contrarian investing can be a powerful strategy.

Just remember, in the markets, it’s not always about being popular — it’s about being right. So next time the crowd is running one way, don’t be afraid to take a second look in the other direction.

You might just find your next big win waiting there.