Investing strategies: Contrarian investing

Contrarian investing involves buying undervalued stocks that others are avoiding and selling overhyped ones that others are rallying by, and profiting when trends change. The concept can also be applied to funds, asset classes and even entire market sectors. But it can backfire if it turns out the herd is right.

What is contrarian investing?

Contrarian investing means going against the general market sentiment. You invest where others are moving money out and sell shares of companies others are overwhelmingly optimistic about.
Investors often react to news with a mob mentality, so they’re subject to being overly excited about buzzworthy companies. These feeding frenzies can lead investors to ignore other stocks so much that their share prices drop below what they’re actually worth. This presents an opportunity to buy shares of companies at a discount and profiting when they rebound. Contrarian investors also sell the shares of overhyped companies that are nearing or at their peak.

Contrarian stocks and funds to consider

Best for low fees

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SoFi Invest

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• Trade stocks for $0 and no annual fee
• Start trading with a $0 minimum deposit
• Get up to $1,000 when you fund a new account within 30 days

Best for beginners

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eToro

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• Easy to use platform with low fees
• Social trading allows you to copy popular portfolios
• FINDER EXCLUSIVE: Get $15 when you sign up and deposit $100

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Robinhood

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• Get free stock upon signup
• Earn 4% interest on uninvested cash with Robinhood Gold
• Get 1% match on contributions to a Robinhood IRA

The money managers at Validea have also created and run a model portfolio based on contrarian investing. While the portfolio has underperformed the S&P 500 since 2003, here are its top holdings. Most have outperformed since they were added to the Contrarian Investor Strategy.
Contrarian investing focuses on undervalued stocks that are trading for less than their intrinsic value. Some of these are American Depositary Receipts (ADRs), which means they’re shares of international stocks trading on US exchanges.

Risks and rewards

The goal of contrarian investing is to buy cheap shares of undervalued companies and profit before they rebound, which will happen when their true value –– or intrinsic value –– becomes obvious to investors.
Meanwhile, you can profit by selling shares of overvalued companies that are on their way down.
Of course, this can backfire. Market sentiment can hold true, and the companies you thought were undervalued keep going down, while those you thought were overhyped continue on a meteoric rise. In those scenarios, you lose money.

Using contrarian investing

Here’s how to approach contrarian investing.

• Do your homework. Research undervalued companies to determine if they’re a good fit for you. Consider:
  • Balance sheets
  • Price-to-earnings ratios
  • Revenues
  • Debt
  • Valuation
• Examine conditions relevant to specific sectors and industries to determine whether you should invest in those sectors.
• Take a look at your portfolio for stocks that may be overvalued, hyped or at their peak so you can decide if it’s a good time to sell.

Intro to table of stock-oriented brokers

Before you engage in contrarian investing, you’ll need a brokerage account to place your trades. So be sure to compare your options.

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Name	Product	Available asset types	Stock trade fee	Minimum deposit	Signup bonus
SoFi Invest SoFi Invest Finder Award		Stocks, Options, ETFs, Cryptocurrency	$0	$0	Get up to $1,000 when you fund a new account within 30 days.	Winner of Finder’s Best Low-Cost Broker award.	Go to site More Info		loading Fetching your data...
EXCLUSIVE eToro eToro Finder Award		Stocks, Options, ETFs, Cryptocurrency	$0	$10	FINDER EXCLUSIVE: Get $15 when you sign up and deposit $100	Winner of Finder’s Best Broker for Beginners award. Not available in NY, NV, MN, TN, and HI.	Go to site More Info		loading Fetching your data...
Robinhood Robinhood		Stocks, Options, ETFs, Cryptocurrency	$0	$0	Get a free stock when you successfully sign up and link your bank account.	Make unlimited commission-free trades, plus earn 4% interest on uninvested cash in your account with Robinhood Gold.	Go to site More Info		loading Fetching your data...
tastyworks tastyworks		Stocks, Options, ETFs, Cryptocurrency	$0	$0	Get $200 in US stocks when you open and fund an account with min. $2,000 for 3+ mos.	Highly commended for Best Derivatives Trading Platform award.	Go to site More Info		loading Fetching your data...
Public.com Public.com		Stocks, ETFs, Cryptocurrency, Alternatives	$0	$0	Get up to $300 in either stocks or crypto when you use code FINDERUS to sign up and fund a new account.	Trade stocks and ETFs commission-free, plus gain access to alternative investments like art, NFTs and more.	Go to site More Info		loading Fetching your data...
Interactive Brokers Interactive Brokers Finder Award		Stocks, Bonds, Options, Mutual funds, ETFs, Cryptocurrency, Futures, Forex	$0	$0	N/A	Winner of Finder’s Best Overall Stock Broker award.	Go to site More Info		loading Fetching your data...

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Bottom line

Contrarian investing involves a lot of research. The strategy takes risk, and you need to analyze a company to determine its intrinsic value. Once you’ve determined this strategy –– and a particular stock –– is right for you, you’ll need a brokerage account to get started. Be sure to compare different brokers to find the one that fits your needs.