It’s often said that the moment to make serious money is to invest when markets have collapsed and everyone else is heading for the hills. This contrarian approach has helped many investors make a profit in some of the grimmest of circumstances.
Recessions, the financial crisis, extreme weather events – whatever makes the herd panic and sell – are the green light for the contrarian investor to start hunting for opportunities.
But, does it always work out? Aside from the obvious buys that we have already widely discussed – online conferencing and streaming services, pharmaceutical and healthcare firms – would going against the grain boost profits during this current pandemic?
During testing times that have been largely predicted, such as a typical recession, seasoned contrarians can spot patterns or reactions that signal good companies are going to be undervalued as markets fall. This is their signal to put money to work when others are likely to be pulling it out.
The battle against Covid-19, however, doesn’t come with luxuries such as showing patterns or provoking foresight. It is a new virus, and the steps taken by countries around the world vary, meaning the impact it has had on economies, populations and businesses are both extreme and yet to be fully realised.
So what are the contrarians looking out for?
Being a contrarian isn’t as simple as snapping up companies when their prices fall. Most companies that hit rock bottom prices are in that position for a reason. The ideal stock to invest in would be one where the fundamentals and chance of recovery remain strong, but they have been dragged down by the market because of the wider situation – the panic, if you will.
Having knowledge like this though requires significant research and understanding of the individual business. This is a skill anyone can learn, and just takes time to work through paperwork, reports and a wide range of analysis.
Another key skill for a contrarian is to not let emotions get in the way. This is easier said than done, particularly when you have put so much time and effort researching a company you really think has a chance.
The key to success is to be ruthless and don’t hang on with fingers crossed waiting for the business to bounce back. Keep an eye on the fundamentals and if they stop making sense, sell.
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