Contrarian strategies can outperform the market over the long term from "summary" of Contrarian Investment Strategies in the Next Generation by David Dreman
Contrarian strategies involve going against the herd mentality of the market. This means buying stocks that are currently out of favor and selling those that are popular. By doing the opposite of what most investors are doing, contrarian investors believe they can take advantage of the market's tendency to overreact to both good and bad news. Over the long term, this approach can lead to outperformance compared to the overall market. One of the key reasons why contrarian strategies can be successful is due to the concept of mean reversion. This means that over time, stock prices tend to revert back to their intrinsic value. When a stock is undervalued due to negative sentiment, contrarian investors believe that eventually, the market will realize the true value of the company and the stock price will rise accordingly. Contrarian investing requires a high level of discipline and emotional fortitude. It can be difficult to go against the prevailing sentiment of the market, especially when it seems like everyone else is making money by following the herd. However, successful contrarian investors are able to tune out the noise of the market and stick to their own analysis and convictions. Another advantage of contrarian strategies is that they can provide a margin of safety for investors. By buying stocks that are out of favor, contrarian investors are often able to purchase them at a discount to their intrinsic value. This can help protect against downside risk and potentially increase the upside potential when the market eventually recognizes the true value of the stock.- Contrarian strategies have the potential to outperform the market over the long term. By going against the crowd and taking a contrarian approach to investing, investors can benefit from mean reversion, discipline, emotional fortitude, and a margin of safety. While it may be challenging to swim against the tide of popular opinion, the rewards of successful contrarian investing can be well worth the effort.
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