The concept of contrarian refers to an investment or investor whose main characteristic is to be in the opposite direction to the general sentiment of the market.
That is, those investments that consist of selling when everyone wants to buy. Or, they consist of buying when everyone wants to sell.
When we speak of the word contrarian we can refer to both the investor and the investment. In such a way that:
- Contrarian investor: He is an investor who is characterized by taking positions (long or short) against the thinking of most investors.
- Contrarian investment: These are the investments that are normally made by contrarian investors. However, it should be noted that the fact of making a contrarian investment does not necessarily indicate that we are contrarian investors.
How to know if an investment is of the contrarian type?
On paper it is relatively simple. That is, simply by following the definition we can deduce what it is and what it is not. However, when put into practice it is more complex.
To know if an investment is contrarian we cannot base ourselves on perceptions about what others believe, we have to know what others think. This is something frankly difficult. However, there are some indicators that estimate it quite well. For instance:
- All Investor Sentiment Survey: It is a survey carried out to investors in the United States since 1987
- VIX: It is a volatility index. The higher the index values, the higher the volatility. This is interpreted as higher rates of fear. On the contrary, lower values of the index are related to tranquility.
There are other indicators to measure market sentiment. But these two are undoubtedly the best known in the stock market.
How do these types of investors invest?
That an investor invests against the general sentiment of the market, does not mean that it always does. For example, if 70% believe that the stock market will rise and 30% believe that it will fall. You do not have to be against it.
These are usually based on extreme values. For example when 90% believe that the stock market will be bullish and only 10% will be bearish. And, in addition, all this matches your stock market analysis, so you invest.
It is very rare, and inadvisable, for an investor to make investment decisions based on what others think. Typically, this investment idea is more of a complement than a main element.