Successful investing is very often a matter of timing. Buy when market sentiment is low and you have won half the battle – that’s exactly what contrarian investors do. The art of contrarian investing actually is very simple: purchase securities or other assets when most people predict that prices will continue to remain at low levels. If the market rises, they sell and make a profit.
But if the popular opinion remains pessimistic or if the market doesn’t change direction, a contrarian investor could be in for a long wait.
Consider Japan’s stock market. The Nikkei 225 peaked at a level of 38,916 on 29 December 1989, and subsequently crashed. A contrarian investor could have thought that buying when the index was, say, at 30,000, was a bargain. After all, that’s a discount of almost 25% off the peak. But anyone who had bought at that level would still be waiting for the market to recover. Even after 28 years, the Nikkei is still short of 23,000.
However, if your contrarian bet does pay off, you can make tremendous gains.